Become financially independent and retire early, that’s the promise of the “FIRE”.
Devotees of the “financial independence retire early” movement adhere to a programme of living frugally, saving hard and investing. Their goal is to build a money pot that will enable them to quit work, sometimes decades earlier than the norm.
Look online and you’ll find a whole ecosystem of FIRE enthusiasts happy to demonstrate how, by paring expenses, squirrelling away salary and investing, they will hit their “magic number” and retire.
But how does FIRE work? And is it possible, or even desirable, to live this way?
What are the basics?
For followers of FIRE, there are a few rules of thumb. Following these rules will enable you to plot your course to retiring early. This could be in your 50s, 40s or even your 30s for some.
The first step is to calculate your “FIRE number” – this is the amount you expect you will need to retire comfortably.
“Your ‘rule of 300’ will give you a good ballpark figure,” says Cian Callaghan of Metis Ireland. “The idea is to multiply your monthly spending by 300, so if you are spending €5,000 after-tax income every month, multiply that by 300 to give you a pot.”
That pot based on spending of €5,000 a month is €1.5 million. Once you get to this figure, work becomes optional.
The next rule of thumb is the “4 per cent rule”: When your savings and investments pot hits your magic FIRE number, you should be in a position to withdraw about 4 per cent of the pot, annually.
Your FIRE number is not a static number. The money doesn’t just sit in your bank account, it needs to be managed so that it can continue to grow and withdrawals must adjust with inflation. But by doing this, the idea is that the return on your investments will continue to provide you with an income as you age.
Getting there
The FIRE formula is one thing, but building that pot of 25 to 30 times your annual expenses is where the hard work lies. This can entail saving and investing between 50 per cent and 70 per cent of your annual income in the first decades of your career. That’s easier said than done.
There is no shortage of FIRE aficionados on social media, sharing extreme money-saving hacks. There are the usual things from cutting subscription costs to assiduously switching utilities, pursuing money-off coupons and discount codes, to borrowing instead of buying or only buying second-hand.
Housing, transportation and food are the three biggest categories you need to cut back on, proponents say. Living in lower-grade lodgings that you can afford or living with family for free will save money big time.
If you have your own home, the “rent a room scheme” can earn you €14,000 a year tax-free. Swapping a car for public transport, home cooking cheap meals and rarely dining out will bring savings too. You might decide to limit holidays and socialising as you’re building your pot too.
Your salary will of course be a big determinant of how much you can save. Aggressively growing your income can mean routinely moving jobs to higher-paying roles.
Working in a well-paid industry will accelerate things further, this means picking the “right” degree, according to Kristy Shen, author of FIRE handbook Quit Like a Millionaire: No Gimmicks, Luck, or Trust Fund Required. Using FIRE principles, Shen retired at 31.
“There can be a real danger to following your passion right away,” Shen has said.
Her passion was creative writing, but instead she opted to study computer engineering, where the pay would be far higher.
Depending on your disposable income, saving enough to invest and retire two or three decades earlier than usual can mean living a frugal life for years.
Unless your household has relatively high earnings, you have access to cheap accommodation, you are child-free or don’t pay childcare, FIRE can mean a long hard slog in your 20s, 30s and 40s towards the ultimate reward.
Rental property myth?
Owning a rental property or two is sometimes presented as a fast track to financial independence and retiring early.
Unless you were lucky enough to acquire a cheap property, with little borrowing, in an area where rental yield is high and you’re not hamstrung by rent pressure zones, it’s far from a sure punt.
“If you are single and earn €44,000 or more, every cent of income you get from a rental property is taxed at 52 per cent. So basically half of your investment returns are gone in tax, that’s not very attractive,” says Callaghan.
Maintaining the property, managing tenancies, and the risk of a non-paying tenant are costs too.
“One of the worst terms associated with rental property is that it’s passive income – ‘I do nothing for this money’. You absolutely are not doing nothing for the money, you have to work for that money,” says Callaghan.
Having money tied up in just one type of asset, such as property, is risky if the market for that asset tanks.
Investing savings in a diversified stock portfolio instead, where you can buy funds that access the entire global stock market, will be less risky, says Callaghan.
“There is always a scenario where it turns out terribly wrong, property values don’t grow or you get a bad tenant and it is very hard to get rid of a tenant.”
Property is more illiquid too – it can take a long time to end a tenancy and sell a property if you need to.
“This idea that I can borrow money now to buy an asset and then by the time I retire, the debt is paid off – I will say from my experience, and we work with hundreds of families, I can count on one hand the number for whom this has actually worked,” says Callaghan.
Will the pot sustain?
Can FIRE retirees really be sure their magic number pot will sustain them for the rest of their lives?
“The idea is that the returns are going to beat the withdrawals over the long term in kind of a self-sustaining pot forever more,” says Callaghan. There are plenty of scenarios where this doesn’t work however, he says. Retirees will have to do some ongoing financial planning to keep their pot on the boil.
“If you want to retire at a certain date, and you have around 300 times your monthly spend in a pot of money, you have to factor in growth, you have to factor in inflation and you have to factor in taxation,” says Callaghan.
“You can’t just take out a fixed amount every month forever, you have to react to what happens in the market, you have to make changes. So having a plan at 40 and not updating it for 20 years is a bad idea. You need to update your plan regularly,” he says.
“I would say a good rule of thumb is to ask yourself, can I realistically, by the age 45, get to €1.5 million? How much do I need at 25 and over the next 20 years to get to that?” says Callaghan.
“If you are young and starting out, do those broad numbers.”
Otherwise two decades of hard slog saving may not actually lead to the outcome you anticipated.
Doing FIRE by yourself without financial advice can be dangerous too, says Callaghan.
It’s when your pot is big, or when you are putting in substantial amounts of money, that a mistake can be detrimental.
“When you are starting out putting in €200 a month and you make a mistake investing, that’s fine. But if your pot is €400,000 or €1.5 million and you make one mistake, that can set your retirement back by years.”
“It’s fine to use rules of thumb, but you need to talk to a financial expert. Or else FIRE is like building a house based on something you saw on the internet.”
[ Half a million euro for a ‘moderate’ retirement? The lump sums you need to saveOpens in new window ]
What’s right with it?
FIRE gets some things right, says David Looney of Alpha Wealth.
“There are good lessons about reducing your expenses and unnecessary leakage, eliminating short-term debt and maxing out your pension, investing money and getting to where you could eventually provide a stream of income where you don’t have to work any more,” says Looney.
[ In your 30s? It’s time to get serious about your pensionOpens in new window ]
He’s come across people in their 30s and 40s pursuing the extreme version, but he’s not a fan.
“Some might be in a fortunate position where they have inherited a family home early on and they don’t have to pay a mortgage, or they don’t have kids or they have a really high-paying job,” says Looney. Achieving the FIRE is probably unrealistic for most of us. Pursuing it will suit some personalities more than others too.
“Some people don’t mind living frugally, they don’t feel like they need to enjoy the finer things in life,” says Looney.
“Others will feel it’s important to have that balance, living life now while still making some provision for the future.”
“Financial planning should be about balance. Putting the money in the right places while still having the confidence to enjoy today. You have to ask yourself, am I really enjoying life right now?”
There is a bigger picture to consider around your values, says Callaghan.
FIRE now shouldn’t be about running away from bad work, but about running towards something better.
“The early retirement piece is about not having to go to work – but that’s not really what the big question is,” says O’Callaghan. “Work can be a good thing. The bigger question is what is it you want to do so badly that you want to leave work behind.”
“The people who get FIRE wrong make it about retiring ‘from’ something as opposed to retiring to something,” he says.
“The focus on good savings habits and investing is great, but trying to save everything now, just so you can get out of work? I don’t like that.”
Followers of FIRE should know that financial independence won’t make them magically happy, says Dr Jordan Grumet, a follower of FIRE and author of The Purpose Code.
[ ‘I can’t imagine giving up’: The benefits of working past retirement ageOpens in new window ]
Money is a tool – those who treat it as a goal, and build their lives around achieving a number, aren’t necessarily fulfilled when they reach it, says Dr Grumet.
While financial independence can provide something concrete to work towards, it won’t give you a purpose either, he says. Pursuing financial independence may even be an excuse to delay figuring out what you really want in life.
