FIRE in the UK: The Financial Independence, Retire Early Movement

Mon Jul 18 2022


What is FIRE? FIRE stands for financial independence, retire early. It's a movement that is gaining in popularity all over the world, and the UK is no exception. People who are part of the FIRE movement are working to make their financial lives self-sustaining, so that they can stop working or reduce their hours as early as possible. There are a number of different ways to go about financial independence, and in this blog post we will explore some of them. We will also discuss why the FIRE movement is growing in popularity, and look at some of the benefits of retiring early. In fact, the FIRE movement should not be a goal at all. It is a means to an end: freeing up your time should allow you to do more of the things you love rather than aiming for a life of unfulfilling nothing-ness.

What is FIRE and why is it growing in popularity in the UK?

FIRE stands for financial independence, retire early. It's a movement that has been growing rapidly in popularity, largely due to the gradual shift to the mainstream of certain personal finance subreddits, including r/FIRE. It's gained something of a cult following, largely due to the strict principles upheld by the community, many of which centre around aggressive expense-cutting and passive, low-cost investing, the combination of which yields strong wealth creation results in 10-20 years. Of course, there are two parts to FIRE, in the UK or otherwise: the financial independence part, and the retire early part.

How do people achieve financial independence and retire early?

The very simple answer is to save more than you spend, and put that money to work: simple. If you take nothing else away from this post, make it that. Vicky Robin's "Your Money or Your Life" is a great introductory guide for those who are skeptical or need a little more detail (or inspiration!). It's focused around maintaining balance, although is perhaps a little skewed towards higher income earners. Which begs the question - do do this, how much *exactly* do I need to be saving. Well, let's break it down.

As discussed, the only real factor that matters is your savings rate, as a percentage of your take-home pay. This is determined by two primary factors: how much you take home each year, and how much you can live on. The first corollary of this is that naturally, if you are spending 100% of your income, you will never be ready to retire. If you are spending 0% of your income, and maintain this, you can retire right away.

Between these two somewhere is (hopefully) where you are now. But as soon as you start saving and investing, your money starts earning by itself. And compounding. By starting early enough or investing a high enough % of your income, your savings can quickly become an exponential snowball. With this income adding to your take-home each year, suddenly you increase the rate at which you're saving, and reduce the years to retirement. We wrote a comprehensive guide on the steps to take for that process here.

But still, how much is enough?

In general, proponents of the movement tend to aim for anywhere between 20 and 60% of take-home pay to be invested. Now, this is a luxury few can afford, but many live incredibly frugally to make this even remotely viable.

The target is generally to live off a safe "withdrawal rate" after you do retire. How can this be calculated? Well, if you work out roughly how much you need to live on, and estimate that your pot will return 5-8% after inflation, you can quickly work out what sort of pot you'll need. For example if you need £50k a year to live, at a 5% growth rate you'll need a pot of £1m to be able to live off the proceeds without drawing down on your capital.

The following chart shows you roughly how long it will take to become financially independent, based on the following assumptions:

  • You earn 5% return on your investment pot *after inflation*
  • You live off an averaged out 4% withdrawal rate from your pot
  • You live off the gains from your pot rather than drawing down on the principal, as mentioned
FIRE in the UK: Financial Independence, Retire Early - savings rate vs years to retirement

Of course, the higher % of take home income you save, the lower your burn rate and the more you have in your retirement pot, so the sooner you can retire. What's interesting is the jump from 25% or so to 50 or 60% - with potential lifestyle or income changes and disciplined saving habits, you can literally buy back time in your own life.

How can you get started on your own financial independence journey?

You have probably already started! The question is more what to change. And this is an interesting one. You can control how much you spend, and how much you earn. Of course, you want to earn as much as possible to give yourself the biggest cushion, and there is plenty of existing literature on that subject. What's more interesting, is the ramifications of cutting spending. Cutting your spending is actually more powerful than increasing your income. This is because every drop in spending has two effects: it increases the amount you can invest, and it also decreases the amount you need to live on for the rest of your life. A double whammy! Consider this next time you think through whether you really need the next XYZ. Of course, if you have any outstanding debt, you'll want to take care of that first in an ordered fashion.

Final thoughts on FIRE and whether or not it is right for you.

Look, this isn't a binary decision. It's unlikely that an aggressively frugal life will be the one you're after, especially combined with the discipline to invest wisely for so long. Plus, do you really want to retire early? You should cultivate habits and hobbies that will make life post-work enjoyable, and the pursuit of a miserly lifestyle will likely not be conducive to that. That being said, there are certainly some interesting lessons to be learned from the movement. The importance of cutting spending where unnecessary, of starting early, and of being aware of how much you'll likely need on retirement day to near enough guarantee a comfortable life at the standard of living you've become accustomed to. For that, we have the solution! The Strabo investment forecasting tool allows you to work out not only what that goal is, but to monitor your progress towards it in real time, automatically. Sign up at the foot of the page to learn more, and let us know how you're currently tracking your FIRE journey!

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