Over the past few years, many of you who are interested in personal finance have come across the FIRE movement. This article will help explain what this movement is all about and how you could be one of the people that follow the movement.
What is Financial Independence Early Retirement (FIRE)?
Financial Independence and Early Retirement, or FIRE for short, refers to achieving a level of passive income that covers all your expenses and spending commitments allowing you to withdraw from the workforce and retire early. Most people who join the movement hate their jobs and thus aim to create a self-sustaining pile of money that let’s them do whatever they want all day, everyday.
People in the FIRE movement are breaking the norms of personal finance. When you typically think of someone who does with their day as they please without having to worry much about money, your mind automatically focuses on pensioners who are living off their pension income. But many people don’t want to wait till they are 65 to start withdrawing their pensionable income. They want the freedom to do whatever they want with their lives now whilst still young and healthy. And this is where FIRE comes in. Fundamentally FIRE is about having complete freedom to do as you please with your time. Usually, the people that seek and achieve FIRE are doing it on modest six-figure sums, not copious millions. The possibility of enjoying a life of leisure on only a few hundred pounds makes FIRE even more attractive and accessible to the average earner. In fact, the less accustomed you are to a high income and its usual accompany high spending lifestyle, the more likely you are to be able to afford it.
The biggest two points for anyone considering FIRE is to be able to generate a sustainable passive income stream whilst also living economically. I discuss both of these points below.
How much do you need for FIRE? And how do you generate it?
This is a question the offers significant debate in the FIRE community as there is no one standardised answer.
I would say you need to generate a level of passive income that covers your costs and gives you sufficient funds to enjoy a decent life. For most people, this would be around the £25,000 per annum mark, which is just slightly below the average wage in the UK of £28,000.
To go about generating the amount you need to gain Financial Independence and retire early, there are a number of methods. You can invest in the stock market via index funds, or buy specific dividend paying stocks, or generate rental income from properties you own or any of the other ways listed in my article titled: ‘What is Passive Income – 12 Ways to Earn Passive income’.
From all the different ways you can generate passive income, investing in the stock market is one of the most common methods members of the FIRE community use. Following on from the 4% rule – which is a rule of thumb used to determine the amount of funds to withdraw from a retirement account each year – a portfolio value of £625,000 is enough to generate the £25,000 in income per year you need in order to retire.
Whilst a figure of £650,000 might sound monumental right now and impossible to achieve, it is much easier to get to than you think. You need to understand that as you are saving and investing to reach this amount, your portfolio is working for you all the while. Your portfolio is working for you long before you hit £650,000. If you’ve only banked £300,000, it’s still growing by £25,000 to £30,000 (or more) all on its own without you having to save any more money.One of the things that make FIRE possible is once you commit to it and do the legwork at the beginning, it really starts to take care of itself. Your first £100,000 in savings is the hardest, whether FIRE is your goal or not. Once you reach that magical £100k investing mark, you will see how your portfolio will rocket higher by simply reinvesting any dividend you receive. The compounding power this brings is truly magical and you’ll see your portfolio grow at a pace that puts raises at your job to shame. For this reason, if you’re on the fence about FIRE, at least follow the steps for it until you bank that first £100,000 in investible capital and then decide then if you want to commit for a few more years. Whether you’re FIRE ready or not, you need £100,000. Save it.
Alternatively, you can retire with a portfolio value of much less if you generate passive income via other sources or don’t need as big an income. Shifting your passive income requirement to £20,000 – still a decent amount – will only require a portfolio value of £500,000 using the stock market 4% method.
Live Frugally to FIRE
The easiest way to become financially independent and retire early is to ensure you have an economical and frugal lifestyle. You need to learn to live on less. The reason for this is two fold. By living frugally:
You are able to save and invest a good proportioning of your income whilst still in the first stage of your journey which is to build a decent size investment portfolio.
Once you retire, you are already used to living frugally so you don’t need as much passive income to live on. This again cuts down the amount you need saved away in your portfolio and you can retire early much faster.
That being said, if you’re over 55 and struggling for money, but own your own home, the solution may be to complete an equity release. To find out more information about whether equity release could work for you check out l&g equity release by ERS.
Most people in the FIRE community agree that you need to be saving at least 50% of your income. Having this high saving rate ensures that you are living on a small income enabling you to accumulate massive saving in a short amounts of time. Think about it this way: for every year you bank half of your salary, you earn a year of retirement. After 3 years of saving 50% of your income, you will have 3 years’ worth of liveable savings.
Well, that is slightly underselling it. Thanks to investment returns, you’re likely to have more. This means every year you reduce your lifestyle now, buys you more than a year of financial freedom later. It’s an attractive trade-off, which is exactly why it spurs so much enthusiasm for the FIRE-y millennials that dare to undertake it.
In order to have this high savings rate, you need to start keeping budgets and sticking to them. You need to stop going out for those expensive meals and instead start cooking at home. You may have to sacrifice certain holidays and trips.The FIRE lifestyle is all about desperately toeing the line between extreme frugality and being straight-up cheap, to the point where you decline social events in order to avoid spending money on gifts or going out. To make it work, you must really want it to work — more than you want beers on a Friday night or even a Netflix subscription.
For a list of articles about saving money, have a look at the ‘SAVE MONEY’ section of this website.
This is the trade-off for wanting to retire early. The frugality necessary for a successful FIRE lifestyle discourages many. You have to really, really want financial freedom over the urge to have a good lifestyle now.
When I first came across the concept of FIRE, it was so intriguing to me because it was the first time I learned about people actually retiring early or becoming financially independent. I thought I’d been prescribed a life where I had to work until I was 67 (sigh!) or much much later, given the norms.
Once I found out that people were challenging the status quo and living life on their own terms, I got extremely excited about my future. For me, the idea of financial independence is extremely appealing. I would love to have total freedom over the work I choose to do and never do things “just for the money.” So even though I don’t plan on retiring early, I just want to become financially independent due to the options it brings.
Even though I am a number years away from financial independence, the concept of FIRE has been embedded in me. This is why I have been investing in a portfolio of dividend growth stocks as seen by the ‘MY JOURNEY’ section of this website. The idea is to attain a level of dividends that will more than support my lifestyle. So whilst pursuing FIRE is 100% optional, pursing the “FI” part of it really isn’t, at least for someone that wants greater control over their time and greater freedom with their life.