The FIRE Movement Explained- Financial Independence, Retire Early
The FIRE movement is gaining massive influence in the UK as becoming financially independent before the traditional retirement age of 65 sounds like the perfect plan to escape the rat race of earning a living. While some may take this as a great opportunity to never work again, others may take this as an opening to do what they love without worrying about making a stable living.
FIRE involves giving yourself a considerable margin of safety in the future by working exceptionally hard in the present; thus, the approach to reaching FIRE is no easy path. You must be prepared for massive sacrifices like finding a side hustle, generating passive income sources, cutting back on luxuries and budgeting strictly, but with the right guidance on the type of FIRE that can suit you best along with the appropriate measures to living a minimalist life, anyone can achieve their ultimate goal. So, let’s go through the depths of what the movement is and how you can make it work best in your situation.
What is FIRE?
The term FIRE is an acronym for Financial Independence, Retire Early. The movement aims to help people achieve financial liberty and take early retirement (sometimes even before their 30s) by rigorous saving (50-75% of your income) and investing combined with a minimalist lifestyle and minimum living expenses. With time, the definition has become much more expansive, where many people mainly focus on the aspect of financial independence rather than primarily focusing on retiring early.
Let’s understand the FIRE movement in more detail by breaking it down into two main components:
Financial independence refers to the situation where you will no longer have to rely on an employer or individual for income, therefore meaning that you will have enough income to support your lifestyle for the rest of your life.
Since financial independence is the process and early retirement is the deliberate result, early retirement surely comes later in the process of FIRE. What is vital to consider is that ‘early’ is a subjective term as it may mean something different for you.
You might consider 50 as early retirement age, while others might consider 30 as early age. No matter which cut off target you choose, early retirement will stand before the traditional 65-years. No matter what your goals are, the earlier you begin, the earlier you retire, and the more time you will have to appreciate and enjoy the returns of your hard work.
How Did the FIRE Movement Begin?
The FIRE movement originated from a book named ‘your money or your life’, which promoted the idea of financial independence from working 9-5 in your 60s. This later added up to the 4% rule, which states that withdrawing 4% of your original balance from your retirement portfolio every year can allow you to live off 30 years without running out of money, which means that you can find your estimated target portfolio to sustain for 30 years by multiplying your yearly expenses by 25.
Apart from this traditional method, there are other types of FIRE that you must know about to help make the most rational decision depending on your case.
The Types of FIRE
Let’s understand the most popular types of FIRE to see what fits you best.
This is the fastest way to achieve FIRE because it favours the lean way of living in the present and the future. If you look forward to living on a bare minimum right now and a low-cost life after retirement, extreme retirement savings can help you achieve FIRE sooner than any other way.
Fat Fire is the perfect contrasting approach to Lean Fire, indicating that if you plan to live off a wealthy and rich lifestyle after retirement, Fat FIRE is for you. But this comes at a higher cost, where it will take you longer to save a higher amount and invest more with a conservative rate of 3%.
Barista FIRE is a more balanced approach to achieving FIRE which focuses on saving enough money to reach early retirement from your primary job. If you plan to work by taking up a part-time job or pursuing a dream career after FIRE, then Barista FIRE is something you can go for.
Like the term suggests, hybrid FIRE enables you to create a fusion of any two or more FIRE types to fit FIRE according to your needs. The key here is to get expert advice on effective financial planning to understand what is best for your situation to make it to FIRE.
How Can You Secure FIRE?
The movement may sound like it’s not meant to work for everyone; however, learning about the details of the movement and making relevant amendments based on your finances can be highly beneficial and lead to FIRE if applied precisely.
Here are a few tips from our financial experts, which will help you achieve financial independence and early retirement.
Raise Your Savings Rate.
The base of the FIRE movement is to have an aggressive savings rate. You can calculate your savings rate in percentage by using the formula:
Savings Rate % = (Net pay – Expenses)/Net pay x 100, where net pay is the money left over after deducting taxes and other charges.
For example, if Alce’s annual Net pay is £100,000 and he saves £20,000, his savings rate would be 20%.
Some insightful information regarding savings rates (while considering income and expenses consistent) can help you understand the importance of saving more clearly such that, with a savings rate of:
- 25% – it will take you 3 years to save to sustain your 1 year considering your annual expenses.
- 50% – 1 year to save for a year.
- 75% – 0.33 years to save for a year.
Most FIRE movement followers put aside 25% to 50% of their total income each month to save more. To be able to save this much in a month demands great commitment and some major lifestyle changes. You also need to identify where to invest your savings as most FIRE savers prefer investing in other tax-efficient opportunities like stocks and share ISAs (individual saving Accounts).
Prioritising your most essential expenses and leaving out the less important ones will increase your savings rate. The simple rule that follows here is: The more you save today, the more you will have tomorrow; thus, exercising proper strategies to cut down on expenses after prioritising can certainly help you achieve FIRE at the right time.
Set Your Retirement Goal
Setting an achievable and realistic retirement goal right now can guide you to take suitable measures towards achieving it. The FIRE movement has many variations; therefore, considering the right expected retirement age for yourself and the type of life you plan to live after retirement can add up to your motivation and guide you to make gradual fixes in your current lifestyle patterns.
Earn More Money
Having enough savings does not always mean cutting down on your expenses and compromising your essentials. Reducing your expenses can surely increase your savings, but you can make it to FIRE even quicker with the additional income. Consider taking a side hustle like a home-based freelance job or work towards a pay rise, changing jobs with better incentives, starting up your own business, and learning new skills for higher-paying job opportunities as you will require a good cash inflow to save and invest a sustainable amount for early retirement.
Invest More of Your Income
Early retirement is rarely a possibility if you are not investing your income somewhere profitable. Generating passive income resources like investing in real estate, low-cost index funds or low-risk stocks, and Stocks and Shares ISA, to reduce your tax liabilities. can help you fight inflation and fluctuating interest rate challenges. Hence, it is important to note that if you are not a professional and are seeking up-to-date market insights, consider taking financial guidance before it’s too late.
Get Financial Advice
Remember that financial independence is not just about reducing expenses, increasing savings, or investing whatever seems sensible; it requires success in all terms of budgeting and planning and, in many cases, requires the best advice available. We advise our clients to maximise their gains by thousands and more while investing a few hundred in their plan first.
Video: F.I.R.E Movement – The Ultimate Guide to Early Retirement
The Roadmap to Financial Independence and Early Retirement
In addition to our tips, here is a step-by-step guide that will lead you to the path of financial independence and early retirement.
Become Debt-free and Build an Emergency Fund
Debt will hold you back from investing for retirement. That is why you should focus on getting rid of any credit cards or other debts that can disrupt your FIRE process. Once you are debt-free, it’s time you build an emergency fund. Contingency planning has consistently helped businesses and individuals; thus, a contingency fund is a right idea when looking ahead. It’s wise to save up to 3-6 months of expenses as an emergency fund to go worry-free about any unexpected expenditures on the way.
Save for Your Children’s College and Pay Off Your Mortgage Beforehand
If you have children, it’s best to start saving for their college so that they can graduate college debt-free. Moreover, while you are focusing on college savings, it is also best to start paying off your mortgage early. This way, you will be able to devote the same amount towards retirement and reach your retirement goal beforehand.
Create a Bridge Account (Open a Taxable Investment Account)
As you have maximised your retirement accounts, now you can open a taxable investment account to serve as a bridge account. This account will help you build a bridge between your retirement age and the time you can take your money out of your retirement accounts.
The good thing about the bridge account is that you will not have to worry about any contribution limits, and you can open one through a brokerage firm and invest in mutual funds as well. The setback of these investments is that you will be charged taxes based on how much money your account earns. The key here is to get the most out of the tax system by taking expert advice from specialised tax professionals to protect yourself from any extra outflows.
The Pros and Cons of FIRE Movement
Although FIRE is a highly appealing movement, there are two sides to the strategy; thus, you must recognise the pros and cons of this approach and weigh them out before you opt for the FIRE movement.
Pros of FIRE
- Time flexibility- You will have more time to enjoy the things you choose at an earlier age with more energy.
- Fewer financial worries- financial stability is a substantial cause of stress, and so you can live a healthier life with FIRE.
- A free passion-filled life- FIRE will let you free from the rat race of making money and allow you to find greater opportunities and pursue your true interests.
- Learn to live a basic life- The saving strategies that you will be applying while working towards Fire will help you learn a lifelong lesson of living frugally.
Cons of FIRE
- An unpredictable future –the evolving tax and financial policies can disrupt your FIRE plan, leaving a loophole in the movement if you do not strategise your budgets accordingly.
- Challenges with reintegration into the workforce- If you opt for traditional FIRE and later decide to come back into the workforce, you may find it hard to reintegrate due to the economic changes and evolving skills in demand.
- Retirement can be dull- some people find life boring without any career goals and achievements. If you are one of them, then opting for a Barista FIRE approach can help you achieve FIRE while you dodge this setback.
- FIRE is challenging to achieve- The challenge of living a minimalist lifestyle with extreme saving and investing strategies is undoubtedly a massive sacrifice.
How Much Sacrifice Does FIRE Require?
The sacrifices you make in FIRE are all up to you. Depending on the type of Fire you choose and your fire targets, your struggles will vary. Minimalism may sound like a must here, but FAT FIRE advocates live a comfortable way and achieve FIRE. It is about making your cost-benefit analysis and understanding that today’s sacrifices will reap their benefits tomorrow.
It also depends on your perception of FIRE. If you look at it as a conscious way to spend and work towards a bigger goal and live a better lifestyle later onwards, you might want to replace the word sacrifice with self-investment.
FIRE– A Practical Movement for Everyone or is it Exclusive?
Many people believe that FIRE is exclusive for high earners, and only extreme savers who can survive on a minimalistic budget can make It work successfully.
However, contrary to this belief, with proper financial planning and budgeting, you can earn, save, and invest up to a point where you can benefit from FIRE. The flexibility and various principles explained earlier within the FIRE movement can help everybody on the path to better financial freedom and financial health.
With the help of clear house accountants, get expert financial advice and unleash your possibilities of making FIRE a practical and possible movement for you rather than exclusive.
Anam has a degree in accounting from the Prestigious St John’s University, and works as a senior director in Clear House.
Before working in Clear House, Anam worked in various commercial roles, the last one being the VP Operations for a prestigious business organisation,working on improving the organisation’s operational efficiency, growth and high level client management.
Anam manages clients ranging from software companies to large property developers and managers. Notably, she recently worked with a large property development company building large scale developments in London and the surrounding area.