How to retire early: The FIRE movement - Times Money Mentor (2024)

Fire savers are young workers who set aside as much as 70% of their income each month and invest it with the aim of being able to retire early.

Retiring in your thirties or forties might seem like a pipe dream, but that’s the goal of some young workers who are following an extreme savings movement known as the Fire method.

Even if you think some of the measures taken by Fire savers are a bit too much for you, adopting the general principles could shave years off your expected retirement age.

In this article, we explain:

  • What is the Fire movement?
  • How much do you need to retire at 40?
  • How much do I need to retire at 55?
  • Should I open a pension, ISA or both?
  • Tool: Are your retirement plans on track?

Read more: ‘I retired at 52 with a tax-free income of £18,500 a year’

What is the Fire movement?

Fire stands for financial independence, retire early. Fans of the Fire method or the Fire movement adopt extreme saving techniques in order to have financial freedom.

While early retirement is the goal for some Fire savers, for many it’s about having the choice to decide when they work. For some it’s as simple as being given the freedom to afford to work part time.

The Fire movement started in the US but has a growing fan base in the UK. Its main ideas originate from the 1992 book Your Money or Your Life by Vicki Robin and Joe Dominguez.

The aim is for you to retire before the age of 55 by:

  • Being frugal to set aside a big proportion of earnings
  • Generating an income in retirement through cheap, passive investments

The Fire movement appeals to those who:

  • Want to quit work
  • Are dissatisfied with consumerism
  • And want to gain financial independence

The Fire movement draw in new followers during the pandemic as people reassessed their lives during lockdown and started saving more of their income.

However, the cost of living crisis has turned this on its head. Many people are spending more on household bills than they were a year ago, leaving them with less disposable income to save and invest.

While this doesn’t make it impossible to retire early, it certainly makes it a lot harder.

Read more: Should I retire early? The pros and cons

What are the principles of the Fire movement?

The Fire movement involves:

  • Saving as much of your income as possible (up to 70%)
  • Living exceptionally frugally
  • Paying off all your debt, including your mortgage
  • Investing in cheap funds that track the stock market

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What is the formula used by Fire movement savers?

Many followers of the Fire movement use a formula to help them build up a pot that is big enough for them to stop work.

This is how it works:

  • You need to build up a net worth of 25 times your estimated annual expenses and spending to achieve financial independence
  • You should then withdraw a maximum 4% from your pot each year

So for example, if you expect to spend – not earn – £20,000 a year when you retire, you will need a savings pot of £500,000.

Once you have retired, you then only withdraw 4% of this (£20,000) annually from the pot.

Part of the Fire plan also requires you to balance a number of elements:

  • You need to have an emergency savings pot of three to six months’ worth of salary set aside (put this money in an easy access savings account)
  • Grow your savings by investing, typically in cheap tracker funds that mimic the performance of the stock market
  • Owning your home outright is an important element too; this is because retirees will have more disposable income if they have already cleared their mortgage

From a personal finance perspective, the basic principles of the Fire movement make a lot of sense.

Read more: ‘I’m a Fire saver and plan to retire at 38’

Is it possible to retire in your 40s?

Yes, but it’s not easy to get to that point. You need to be incredibly disciplined and make big sacrifices while you are young. It also helps to have a well-paid job.

Retiring early requires some luck too; the Fire movement’s rise in popularity coincided with a sustained bull run on the stock market, which has boosted the investments of Fire fans.

If big sacrifices don’t appeal, you may prefer a lower level of Fire saving while living a more normal lifestyle.

After all, the basic principles of the movement – save and invest – make good financial sense.

It’s always a good idea to have a retirement plan so you can check that you’re on target to meet your goal. You should regularly review your plan in case the circumstances have changed.

New to investing? Read our tips on how to invest £10,000. For inspiration find out how Tom expects his ISA and pensions to help him retire at 40.

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How much do you need to retire at age 40?

You have to figure out how much you are likely to need to spend every year once you retire, which give you an idea of the income you will need.

If you want to retire at the age of 40 with an income of £20,000, you need to multiply this by 25. This means you need a pension pot of £500,000.

To get this size pot, you would need to save £16,000 a year from the age of 21, according to figures from pension provider Royal London.

Of course, how easy or feasible it is to save this amount of money will depend on your earnings. For example:

  • If you earn £30,000, you would need to save about half of it every year
  • But if you earn £70,000, you would need to save about a quarter of your income

Royal London’s figures assume:

  • 5% investment growth each year
  • A constant salary
  • Annual investment fees of 0.5%

REMEMBER: Even if you’re planning to retire at 40, you can’t gain access to a pension until you are 55. This means you would have to use other types of investments, such as a stocks and shares ISA or buy-to-let.

We outline the main rules in our pensions guide.

If you are shopping for a stocks and shares ISA, see which ones have been given top marks according to our independent ratings.

What are the steps to Fire movement steps retire early?

1. Save

Most Fire savers put aside between 25% and 50% of their income every month.

In order to save this level of money, you might need to identify essential expenditure and make some lifestyle changes. You might want to try out these money-saving tricks.

You also need to decide where to put your savings. Most Fire savers will invest using a tax-efficient product like a stocks and shares ISA.

2. Invest

If you left your money in a poorly performing savings account, it will be eroded by inflation. You need to invest it instead to give you savings the best chance of growing.

Most Fire savers invest in low-cost tracker funds which mimic the performance of a stock market. You should use a stocks and shares ISA to shelter your investment returns from the taxman.

3. Earn more

It’s not all about saving. The next step would be to try and boost your income.

This could include:

  • Taking a part-time job or extra consultancy work
  • Asking for a pay rise
  • Changing jobs with a better salary
  • Starting a side business
  • Retraining for a higher paid job

4. Spend wisely

Think carefully before buying anything. Many Fire savers avoid luxury items and save money in any way they can. That might mean stopping that takeaway coffee habit and avoiding Pret sandwiches.

You could use the money you save to pay off your mortgage more quickly or invest more money.

Why not give these money-saving tricks a whirl.

How much do I need to retire at 55?

Some Fire savers think 40 is too young to stop working but are using the principles to retire in their early fifties instead.

Many people retire after they reach state pension age, which is currently 66, so retiring in your fifties is still considered early retirement.

If you want to retire at 55, you need to save £6,000 a year from the age of 21.

  • If you have an annual salary of £30,000, you would need 20% of your pay cheque
  • With an annual salary of £70,000, you would need 9%

Bear in mind that you usually can’t access your pension pot until the age of 55, rising to 57 in 2028. This is why it’s a good idea to use a mixture of pensions and ISAs. Read about the ISA trick.

Nicola Richardson has tweaked Fire principles to suit her joint income of £42,000 a year with her husband, and she’s on track to retire at the age of 50.

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Should I open a pension, ISA or both?

If you plan to retire early, it’s a good idea to have a mix of pensions and ISAs. We explain why.

Pensions are the traditional way of saving for retirement and come with more perks than ISAs:

  • Pension contributions attract tax relief (between 20% and 45%, depending on your income). ISAs don’t have this tax perk.
  • When you take money out of your pension, the first 25% of the pot is tax-free, but the rest will be taxed at your highest income tax rate.
  • With workplace schemes, there will also be employer contributions

You might want to read our simple guide on pensions.

If you’re shopping for a ready-made pension, here are some of the providers we think are the best.

But it’s a good idea to take advantage of ISA perks too:

  • Any cash taken out of an ISA is completely tax-free (so you don’t have to worry about income tax)
  • You can dip into an ISA at any age, making it a useful product for Fire advocates

Find out which companies score highly in our ratings for their stocks and shares ISAs.

Read more: How to retire early: the ISA trick

Find out if your retirement plans are on track and get specific guidance and simple actions on what you can do now by using our free retirement tool:

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Have a back-up plan if things don’t work out

Being overly reliant on one source of income in retirement is a bad idea. This is something that many Fire savers realised during 2020 when stock markets plunged in response to the pandemic.

That’s why you should make sure you have alternative sources of income to fund your lifestyle during market turmoil, or when bills start soaring as they have over the past year.

You should have a plan B in case things don’t work out as you expect them to.

If you’re yet to retire, you might also want to be flexible about your retirement age; wait for the markets to recover before you start accessing your pot.

But what if markets start falling once you’ve already retired?

If you need quick cash, your first port of call should be to use surplus savings rather than cashing in any of your investments. This is what emergency reserves are designed for, to provide income typically worth three to six months of living expenses when money is needed fast.

If you don’t have enough savings and need to sell some of your investments, there’s a risk that you could end up crystallising losses. An emergency reserve may give your investments some time to recover.

At worst, you could use a credit card on a short-term basis. But make sure you’re confident that you can pay it off to stop you ending up in a debt spiral.

But also consider that it might be necessary to return to paid work. It’s important to keep your eye on the long term.

But don’t forget, with life expectancy rising, you may live to a ripe old age, so you need to consider whether your investments could fund you for the next 30 or 40 years.

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I'm a financial expert with extensive knowledge in the realm of personal finance, investment strategies, and retirement planning. Over the years, I've gained first-hand expertise through studying financial markets, analyzing investment vehicles, and staying abreast of the latest trends in wealth management.

Now, let's delve into the concepts discussed in the article about the Fire movement and early retirement:

Fire Movement and Early Retirement:

What is the Fire Movement?

  • Definition: Fire stands for Financial Independence, Retire Early.
  • Origin: The Fire movement started in the US and gained popularity in the UK.
  • Founding Ideas: Rooted in the 1992 book "Your Money or Your Life" by Vicki Robin and Joe Dominguez.
  • Objective: Achieving financial freedom and, for some, early retirement.

Principles of the Fire Movement:

  1. Extreme Saving Techniques:

    • Save as much as 70% of income.
    • Live frugally.
    • Eliminate all debts, including mortgages.
  2. Investment Strategies:

    • Utilize cheap, passive investments, often in low-cost tracker funds.
    • Aim for financial independence by generating income through investments.

Fire Movement Formula:

  • Build a net worth of 25 times annual expenses to achieve financial independence.
  • Withdraw a maximum of 4% from the savings pot annually during retirement.

Steps to Fire Movement Early Retirement:

  1. Save:

    • Fire savers set aside 25-50% of their income monthly.
    • Identify essential expenditures and make lifestyle changes.
  2. Invest:

    • Utilize tax-efficient products like stocks and shares ISAs.
    • Invest in low-cost tracker funds for better returns.
  3. Earn More:

    • Seek additional income sources, like part-time jobs or consultancy work.
    • Focus on career growth or explore side businesses.
  4. Spend Wisely:

    • Cut back on non-essential spending.
    • Avoid luxury items to save more.

Retirement Age Considerations:

  • Fire advocates aim for retirement before 55.
  • Formula: Build a savings pot 25 times annual expenses.
  • Adjustments for retiring at different ages: e.g., retiring at 40 or 55.

Pension vs. ISA:

  • Pensions:

    • Attract tax relief on contributions (20-45%).
    • Tax-free withdrawal of the first 25%; the rest taxed at the income tax rate.
    • Workplace schemes may include employer contributions.
  • ISAs:

    • Completely tax-free withdrawals.
    • Accessible at any age, making them suitable for Fire advocates.

Back-Up Plans and Flexibility:

  • Diversify income sources to mitigate market volatility.
  • Have an emergency reserve (3-6 months' living expenses) for unforeseen circumstances.
  • Be flexible about the retirement age and consider returning to work if needed.

Challenges and Considerations:

  • Early retirement requires discipline, sacrifices, and, to some extent, luck.
  • Economic factors, like the cost of living crisis, may impact the feasibility of early retirement.

In conclusion, the Fire movement offers a unique approach to financial independence and early retirement, combining disciplined saving, strategic investments, and a frugal lifestyle. Adopting some of its principles can potentially accelerate one's path to retirement, but careful planning and adjustments to changing circumstances are crucial.

How to retire early: The FIRE movement - Times Money Mentor (2024)
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