It is a lifestyle movement where the goal is to achieve financial independence and retire early, rather than depending on the traditional 9-5 lifestyle. An individual drastically cuts down on expenses, increases their income and invests their savings wisely to grow their assets. The aim is to grow their assets enough that they can live off small withdrawals from this; they live off their passive income. Often individuals aim to retire in their 30s or early 40s.
How did it start?
It began in the US from the book “Your money or your life” (1992) by Vicki Robin and Joe Dominguez. A key principle of the book is that an expense should be judged on the volume of hours it took to be able to buy it. The FIRE movement grew through the 2000’s mainly online through influential blogs, such as Mr. Money Moustache. It’s primarily popular with millennials.
What is the 25x rule?
Individuals usually have a goal to save at least 25 times of their estimated annual living expenses in retirement, though some recommend saving 30-40 times. For example, if your annual expenses will be £30,000 then you will need to save at least £750,000 to retire to be able to live off the passive income. Once an individual has done this, they have achieved FIRE.
What is the 4% Rule?
This is the amount that is generally considered safe to withdraw from retirement assets or investments once an individual has reached retirement. This amount is not supposed to impact on the overall investment, meaning that 4% can be withdrawn every year. For example, if you have £100k in assets then you can withdraw £4,000 per year, with the aim of growing your investments by more than 4% so you still have 100k.
However, the 4% rule does not factor in investment fees. It is based on traditional retirement, which lasts 30 years; whereas individuals who reach FIRE have a longer retirement, even up to 70 years. It is also based on how the stock market performed from 1926-1992, which may not be a reliable indicator of how it will perform in the future. Some individuals withdraw less than 3.5%, adjust it according to inflation or have a dynamic withdrawal strategy based on how the stock market is performing. Others also have a second passive income stream to draw on when the market is low to avoid withdrawing money when it’s nor performing well.
How do you achieve FIRE?
First, individuals calculate their FIRE number through determining their annual retirement expenses. They make a well thought out plan and budget, which is tracked stringently. They focus on the type of lifestyle they want to achieve and what they will do with their time in retirement – keeping this goal in mind.
Then they focus on paying off high interest debt through overpaying. For lower interest debt such as mortgages, some individuals argue it’s better to not pay it off and gain more money from investing, while others prefer to be debt free.
An important area is to reduce expenses; and to analyse each expense to see if it can be removed or reduced. In particular the biggest ones which are housing, food and transport. This could include renting out a room or moving to a cheaper place. It could be meal prepping and taking public transport instead of owning a car. This also often means choosing to do free events such as free museums. Cutting out an unwanted expense also means potentially reducing your retirement expenses and means you will reach FIRE quicker.
There is a big focus on saving money, the aim is to save between 50%-75% of income. This is then invested; usually in the stock market (often in Exchange Traded Funds (ETFs)), in real estate (such as real estate investment funds) or building a property portfolio.
Individuals also focus on increasing income. This could be through getting a raise, switching to a higher paying industry, moving companies to a higher paying role, a side hustle or buying and growing a business.
What are the different types?
Lean FIRE: retiring early with fewer assets that only cover basic necessities and require living frugally – a minimalist lifestyle. This could even mean moving to a cheaper country.
Barista FIRE: semi-retiring by working part time and withdrawing from the retirement savings.
Coast FIRE: semi-retiring and not touching the retirement savings. Instead using an alternative income to cover expenses only, such as working part time. This could be to pursue a lower paid dream career.
Fat FIRE: retiring early on a large accumulation of assets and passive income with no concerns of living expenses in retirement. These individuals typically have higher paying jobs or have saved for longer.
What are the positives?
It helps you plan for you future and encourages you to think about retirement
It causes you to evaluate every expense to see whether you really value it
It improves your money management skills
It provides you time to pursue hobbies or another career without pay being a factor
What are the difficulties?
If you are on a very low income, it can be almost impossible to achieve the high proportion of savings required to retire early, however you can still benefit from the good money management principles
It may involve missing out on some activities, such as holidays with friends, in order to save money
Finding a partner who shares the same financial goals can be difficult
There is a lack of diversity in the movement, with fewer women and BAME people.