How to retire early: the FIRE movement

The FIRE movement is steadily growing in the UK, helping people achive their dreams to retire early in their 30s and 40s. We look at what it is and how you too could retire early using extreme saving and investing strategies. 

FIRE - Financial Independence, Retire Early - has gained more appeal as a result of the pandemic with one in four 18 to 34 year olds setting this as a new goal, according to research by the wealth management firm Moneyfarm (opens in new tab).

The Great Resignation, an economic trend that began in early 2021, that has seen mass resignations and pandemic-inspired decisions to live life now, may also have inspired people to look at their finances differently.

Even if some of the methods seem a bit too much for you, adopting the main principles of saving, investing and learning to live well on less could take some years off your expected retirement age.

What is the FIRE movement?

The FIRE movement encourages frugality, extreme saving, investing and developing a passive income to fund retirement. Its main ideas stem from the 1992 book Your Money or Your Life (opens in new tab) by Vicki Robin and Joe Dominguez. 

It involves saving as much as 70% of your income and paying off all debt, including your mortgage.

FIRE has this formula: 25 x your annual spending = financial independence.

So, if you expect to spend £20,000 a year when you retire, you will need savings worth £500,000 to fund this. Once you have retired, you withdraw 4% of this (£20,000) a year from the pot.

The FIRE movement has four further suggestions to help you manage your finances:

• Build up emergency savings to cover three to six months’ living costs
• Achieve outright home ownership
• Grow your savings by investing
• Increase your income with a side hustle or freelance work

How much do you need to retire at 45?

You can’t touch your pension until you are 55 - rising to 57 in 2028 - so to retire by the age of 45 you need readily available cash, such as in a stocks and shares ISA.

If you want to retire at 45, and have £20,000 to spend each year, you could save £200,000 in an ISA and £300,000 in a pension in order to hit your early retirement target. To achieve this, you’d need to save the following amounts, according to calculations by the investment platform Hargreaves Lansdown.

If you are 20 years old - £370 a month into an ISA and £350 a month into a pension 

If you are 25 years old - £530 a month into an ISA and £480 a month into a pension

If you are 30 years old - £800 a month into an ISA and £750 a month into a pension

This assumes 5% annual investment growth, and includes tax relief and an employer contribution in the pension figures. 

While FIRE is traditionally associated with scrimping and saving and needing a high salary, this is slowly changing as more people find ways to adapt the rules to their needs. 

If saving massive sums - and making big sacrifices - don’t appeal, you may prefer a lower level of FIRE. This may involve an older retirement age of, say, 50, while still saving as much as you can but living a more normal lifestyle. You may find building up a mix of investments such as a lifetime ISA (opens in new tab), pension (opens in new tab) and a paid-off home (opens in new tab) is enough depending on your desired lifestyle and what part of the country you live in.

After all, the basic principles of FIRE - save and invest - make good financial sense. 

David Scothern, for example, has tweaked FIRE principles to suit his annual income of £34,000 (opens in new tab) and feels he is on track to achieve financial independence at 40 after building up a stocks and shares ISA and investing in buy-to-let properties with a friend. “I’m focusing on the ‘financial independence’ part of FIRE and less on the ‘retire early’ part,” he says. 

There are many resources online to help you overhaul your finances and way of thinking about money. The Humble Penny (opens in new tab) is a blogger and Youtuber who has recorded his journey to financial freedom and is passionate about helping people understand money better. Money shows are also a source of inspiration: read how Natasha Evita binged on TV shows during her lunch break before she started investing.

Retiring early during market uncertainty

The decade-long bull run on the stock market since the 2007-2008 financial crisis boosted FIRE enthusiasts' investments.

In March 2020, that all changed when the coronavirus pandemic hit, and global markets plummeted 20%. 

This has played havoc for some FIRE followers’ finances. When the market is down, taking money from a stocks and shares ISA or pension during early retirement does not have the same pound-for-pound cost compared to when the markets are high. This means they could deplete their savings faster than expected.

Those with an income from rental property may have also struggled due to tenants unable to pay rent and a ban on evictions.

And now in 2022 FIRE devotees are facing more stock market volatility, high inflation (opens in new tab) and low interest rates as well as rising energy bills (opens in new tab), taxes (opens in new tab) and mortgage rates (opens in new tab) that are putting pressure on household incomes. It's yet more havoc for FIRE devotees' finances.

It is therefore important to build substantial savings in case of unforeseen circumstances. This is where earning extra income from part-time work or a side hustle can be important. Research by Henley Business School in 2020 revealed one in four UK adults has a side hustle and these people make 20% of their household income from their side hustle.

Ensuring you have a good credit score so you have the option of a 0% interest credit card if necessary is a good idea. You may want to consider a 0% balance transfer credit card (which lets you move debt from an old credit card to a new one with 0% interest rate) to maximise the time you have to make repayments. 

It may also be necessary to return to paid work.

Being flexible about your early retirement dream is also helpful. Nicola Richardson - who plans to pay off her mortgage at 45 and retire at 50 - ended up saving more during the pandemic but is pragmatic about the unforeseen costs of raising two sons. “Expenses for the boys will change as they get older! If it takes us a bit longer and we retire at 55 then that’s ok.”