PLAYING WITH F.I.R.E.

Wouldn’t it be great to retire at 40 and never work again?

You could finally book that dream trip around the world, go off grid and reconvene with nature, or just kick back and catch up on some rest and relaxation.

Retiring at 40 may sound pretty extreme, but that’s the goal for followers of the Financial Independence, Retire Early movement, known as “F.I.R.E.”. 

Social media is peppered with inspiring images of campervans driving across sunlit plains, complete with trendy Patagonia-clad healthy-looking campers. 

It’s an amazing vision, but is it realistic?

Let’s take a look at some of the principles behind the F.I.R.E. movement and unpack the details. 

What are the rules for F.I.R.E.?

F.I.R.E. followers often describe their movement as the “ultimate life hack”.

They reckon it’s possible to retire in just 10 years by following these simple rules:

1. Switch to a minimalist lifestyle and live frugally to free up money for investing.
2. Keep a super tight budget where you account for every penny.
3. Invest between 50% to 70% of your after tax income in a simple tracker fund.

There’s just one catch. You’ll have to do some seriously gruelling cost-cutting to get there.

How much do you need to invest?

F.I.R.E. advocate Mr. Money Mustache (yes, really) explains what he calls “The Shockingly Simple Math Behind Early Retirement” on his popular blog. 

To get some rough figures, he assumes you’re starting from scratch and you achieve 5% investment returns each year. When it comes to retirement the numbers are based on matching your current spending level and withdrawing 4% from your investment pot each year.

The sums that you need to save are eye-popping! According to his after-tax calculations, you need to stash away:

• 64% of your annual income to retire in 10 years 
• Or, 50% of your annual income to retire in 16 years 

With some idea about the scale of savings needed, let’s look at some of the drawbacks.

1) It's not affordable for many

Of course, one major downside is that investing large sums can leave you with little money left for day-to-day living. In fact, many critics argue that investing such large proportions of your salary is unaffordable for all but the highest earners.

Investing a big slice of your income is a tall order for modest earners who have to spend a bigger proportion of their salary on their basic needs like food and shelter. If you’re on a tight budget already, there’s a limit to how much you can cut back on housing costs and essentials.

If you’re a high earner, you may have flexibility to reduce your spending. But the kind of reductions the F.I.R.E. movement requires are still extreme by most measures. Cutting out gym memberships, subscriptions, meals out and vacations can go some way, but at what cost?

2) Extreme frugality alert

Slashing your spending in half isn't for the faint hearted. And with drastic spending cuts comes significant lifestyle changes. We’re not just talking about cutting out the odd latte here and there. 

The F.I.R.E. followers often follow a minimalist lifestyle, spending virtually nothing for years on end. Some even live off grid in the wilderness while others move to cheaper areas to trim their housing costs.

If you love simple pleasures then you might enjoy the sacrifice. But most of us love our creature comforts, takeaways, and holidays. Living on 30% or even 50% of your after-tax income isn’t exactly a recipe for fun. And it’s not just for a few months, it’s for a decade or more.

If you have a family then they might also have opinions on the subject! Will they all be happy to embrace a new super frugal lifestyle? Will your teenager be keen to swap trendy trainers for cheaper knock-offs? Will they accept no school trips and a caravan in the drizzle for their summer break?

What's more, we all know that unexpected costs have a habit of cropping up. What happens when you need a new car or your boiler blows up? What if taxes go up and you suddenly have less take-home pay?

Despite its merits in moderation, this extreme frugality is not for most people. 

3) Taking a financial risk

There are also financial risks with early retirement.

Retiring young means your investments might need to fund you for over 50 years. This long time frame makes the risk of running out of money much greater. Even small economic changes could knock you off course. 

The last few years have shown how skyrocketing inflation can suddenly come calling. Imagine you were living on a small pension pot. Your expenses jumping up could mean your pension income has to stretch further and further, leaving you with a dwindling balance.

You may find yourself running out of money in your 60s when it’s much harder to kickstart a new career. 

Playing with F.I.R.E.

Despite these issues, there are still some major positives about the F.I.R.E. movement. Although, maybe hold off on purchasing that campervan just yet.

The F.I.R.E. movement’s message about investing is one to pay attention to.

F.I.R.E. devotees are spot on about the power of compounding. Regular and early investing is one of the best ways to build long-term wealth. Compounding helps your wealth to snowball over time, meaning that amounts you contribute in your 20s and 30s are worth their weight in gold later on.

Although you don’t need to join a financial bootcamp, it’s true that many of us may need to invest more. As a rough rule of thumb, experts suggest that we should aim for a pension pot of around £400,000 if we’re retiring in our late 60s. You’ll obviously need more if you plan to retire early.

It’s also really useful to set financial goals. It’s easy to drift along and not plan ahead financially. But making small changes now can make a huge difference over time.

Many of us could make more of our hard-earned cash with a bit of planning and budgeting. It’s not necessarily about depriving yourself of those creature comforts we all love, but making sure you're spending on the things that really matter to you.

With dedication, hard work, and investing discipline, you really can get much closer to the retirement you want.

Not to pour cold water on anything 

Although extreme frugality is not for most of us, it’s also possible to take the best bits of F.I.R.E. while skipping the beans and rice.

Focusing on building a decent investment pot could give you more options to step back from the world of work in your 40s and 50s. You could carry on working part time, while letting your investments continue to grow.

Ultimately, the longer you carry on investing, the longer investment compounding has to work its magic. Invest for 30 or 40 years, and you'll be much closer to making your retirement dreams a reality.

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