How to Retire Early with FIRE

The FIRE movement is an exciting revolution taking over the typical financial route that society sets out for us. And that is the long-trodden path of working from the age you graduate school or university until 65, retiring on your pension and any extra savings you hope to have put away, hoping you’ve got enough to last you, and hoping you still have the energy to live your life in older age.

The rat run for life… kinda depressing for you too?

So let’s talk about FIRE.

FIRE stands for Financial Independence Retire Early. The goal is to build enough wealth in invested savings to allow you to retire early and be sustained by passive income from your pot (due to being invested) for the rest of your life without having to rely on salary from a job.

Sound too good to be true? It certainly is not, and the most exciting thing about the FIRE movement is that normal people, with normal salaries can achieve FIRE. You do not have to be on a 6 figure salary to eligible.

And maybe when I read about FIRE at the beginning of my financial journey, this is what ignited my real passion for personal finance. Because ordinary people could take simple but bold and effective action in their finances and create HUGE opportunities and change for their future.

Don’t want to work forever? You can do something about that!

FIRE can be totally adaptable to everyone’s specific circumstances and needs.

And I totally get that some people are luckily enough to love their work and never really want to retire. But for some, their jobs are a means to an end and it allows them to do the things they truly love outside of work.

And financial independence, doesn’t necessarily mean the same thing to everyone. You might reach a point of wealth where you don’t need an income from your career, but if you love it, no-one is telling you to stop working. Or it can mean you choose to work part-time, or take longer and more frequent breaks from work for example.

Additionally, some people are aiming for early retirement in their 30’s, whereas others aim for early 50s. Your goals are personal and therefore the amount you save is individual to you too!

Types of FIRE

Building on my previous point, FIRE can look different to different people. There are a few types of FIRE which dictate the age people plan on becoming financially independent. These take into account the lifestyle people want during their working lives, how frugal they are and how much of their income they save. Let’s take a look at the main types…

LeanFIRE – This requires stringent adherence to minimalist living and extreme savings, necessitating a far more restricted lifestyle. Many Lean FIRE adherents live on £24,000 or less per year.

FatFIRE – This is for a person who wants to maintain their traditional lifestyle who aims to save substantially more than the average worker but doesn’t want to reduce their current standard of living. It generally takes a higher salary and aggressive savings and investment strategies for it to work.

BaristaFIRE – This is for people who want to exist between the two choices above. They quit their traditional 9-to-5 jobs but use a combination of part-time work and savings to live a less-than-minimalist lifestyle. This type of FIRE appeals to many people because you don’t have to save up as much money as LeanFIRE but allows you a lot more freedom in life.

So how does FIRE work?

You may have heard of the 50:30:20 rule which dictates you use 50% of your after-tax income for needs, 30% for wants, and 20% for savings.

FIRE devotees dial up the savings, and plan to save sometimes up to 70% of their income (depending on how early they plan to achieve FIRE). This often means people have to create a much more minimalist, frugal lifestyle in the short-term, for long-term gain. ‘Living below your means’ is the FIRE mantra.

They key also is to invest these savings (after you’ve got an emergency fund in place of course). As over time, these savings will continue to gain interest and grow and support you through a long retirement. By planning to take out a specific percentage each year, the goal is for interest to work its magic have replaced that amount by the next year.

How much do you need to retire on?

Most commonly, people aim to have invested 25 times the amount of their predicted yearly expenses. It’s important therefore to consider what sort of lifestyle you’d like to have for the rest of your life. As although you might only be spending a small proportion of your income while you save, severe frugality isn’t always sustainable or conducive for a happy and easy life.

Often FIRE followers however do try to live a life of simplicity without excessive consumerism.

What is the 4% rule?

Once they’ve saved 25x your yearly expenses, followers of the FIRE movement usually then plan to take out 4% of that pot each year to live on.

This 4% is also variable but is the most common Safe Withdrawal Rate (SWR). The SWR is the maximum rate at which you can spend your retirement savings, so that you don’t run out in your lifetime.

4% is often used as a SWR for those who plan to never work a day in their lives again. But for the most part, this might not be true for a lot of people. People might want to work part-time, or have other income providing assets like rented properties. Mr Money Moustache goes into a lot more detail here, if you want to learn more about withdrawel rates.

So what if you have to withdraw more than you accounted for when you planned your retirement amount? Like many FIRE followers say, even if you do have to go back to work then your worst case scenario is everyone else’s normality.

Could it be for you?

People may well be put off by some of the extreme lifestyles exhibited by serious FIRE devotees who plan to retire in their 30s or 40s, but a more achievable BaristaFIRE for when you reach late 40s or 50s sounds a lot more attainable and not as sacrificial.

Even if early retirement isn’t a personal goal for you. Implementing some FIRE habits and tactics to your personal finances still puts you in a really good place financially. These include automating savings, paying off debt first, creating an emergency fund, and pound-cost-averaging while investing. Check out my blog on investing if you’re not sure how to get started!

The final thing to note is that being able to achieve FIRE certainly takes a lot of self-discipline and work, but that’s not to say that it doesn’t come from a place of privilege first of all. It’s important to acknowledge not everybody can put away savings each month.

Although many people can achieve FIRE with normal teachers’, vets’, 5 figure salaries… You do need to be earning enough to enable you to actually live below your means. I recognise not everyone in society is in this privileged position.