What is FIRE and can it help you retire early?

Do you dream of giving up the day job and enjoying the freedom that would bring? You’re not alone. But many don’t want to wait until retirement age winter years to kick back. Can the FIRE movement help?

FIRE - financial independence, retire early – is a personal finance strategy that involves extreme investing and frugality during your working life in order to enable early retirement and financial freedom. In theory.

The concept was first established in the US in the 1990s, and encourages a series of tactics that have the potential to allow someone to give up work in their 40s.

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So, how does FIRE work and can it really help you stop work sooner and 'retire' comfortably?

What types of FIRE strategy are there?

There are number if ways you can approach a FIRE strategy. These include:

• ‘LeanFIRE’ requires strict frugality and living on a bare minimum budget to achieve your goals faster;
• ‘FatFIRE’ means putting significantly larger amounts away in the hope of a more luxurious retirement;
• ‘BaristaFIRE’ strives for an early retirement funded by a healthy income-generating investment pot, topped up with a part-time or low-stress job.

Katharine Photiou, managing director, workplace savings at Legal & General (L&G) says the approach that appeals to most people is likely the third, because it offers maximum choice for less sacrifice.

“We go from birth to nursery, into primary school, then secondary school, university or further education, then work... there’s all this structure and process. There’s no sense of freedom.”

She says the true benefit of FIRE-related movements is raising awareness of money matters.

“They shift the conversation from being one of ‘when can I retire’ to one of financial freedom. And anything that gets people thinking about their finances – especially encouraging youngsters to engage with their finances sooner – is positive.”

If FIRE taken to the letter feels extreme, she says thinking about the kind of life you want to live, what makes you happy or how much is enough are healthier conversations.

“At its heart, FIRE is about control, flexibility, choice and having options. Having a career break, reducing your hours, starting your own business or taking a sabbatical, these are all positive.”

What can the FIRE movement teach you?

Louise Matthews is an advertising copywriter who lives in North London. She stumbled upon the Rebel Finance School – which runs courses to help people better manage their money (and advocates the FIRE movement) – on Facebook.

“At first the group felt quite aspirational, and at times annoying,” she says. “People were talking about having a lot of money and it didn’t feel aligned to my situation. I almost left a couple of times. But since participating in the course, I’m finding it more helpful – plus a lot more people have joined who are just starting out and have debt questions.”

Matthews was self-employed for over a decade before taking a full-time job two years ago, seeking financial security as freelance life was looking more precarious.

“My partner started his own business about five years ago and hasn’t been able to contribute much to the household bills, so it’s pretty much all on my shoulders.

The couple doesn’t have a mortgage (they rent from a private landlord), nor any real savings besides a £3,000 nest egg set aside for their daughter. Matthews has around £50,000 saved into a pension.

“Finances-wise, we’re in quite a bit of debt, which was my impetus for doing the course. I have a personal loan with around £11,000 still outstanding (it was £25,000 so I’ve paid quite a bit off over the past two years), and another £14,000 on interest free credit cards.”

One lesson the course teaches is to try and put away £1,000 into an emergency fund before proactively paying off any debt.

Like many Brits, even though she’s only 42, she’s feeling the consequences of not starting sooner.

“I grew up with a mentality that money is fun money – ‘you only live once’ – that has made it hard to get out of debt. I used to say ‘yes’ to everything and worry about it later, hence having lots of interest-free credit cards,” she says.

Financial independence, or freedom, for Matthews isn’t about giving everything up to retire in her 40s, but about building better habits for a financially ‘freer’ future.

“What I’ve learnt is that [my lifestyle] isn’t sustainable. I don’t want to be in debt anymore. So my priority is to work hard to get out of it.”

Why investing earlier is so important

L&G’s Decades Ahead research estimates around nine million people aged 25-54 are currently not on track for an adequate retirement, taking into account basic needs, current income and housing costs.

Starting early and taking small steps beyond the bare minimum (like the 8% auto-enrolment through a workplace pension) has such a greater impact than thinking about saving huge amounts, says Photiou.

“A 27-year-old putting in just an extra £30 a month, at state pension age would have an additional £100,000. Just invest as early as you can, and stay invested.”

Alex King, founder of personal finance education platform Generation Money says it’s worth bearing in mind that, traditionally, the FIRE movement came from the US, so to beware guidance may be aimed at different audiences.

Done well, he says FIRE can deliver real freedom, but it relies on strong earnings, careful planning and navigating risks like inflation, market volatility and longevity.

Is FIRE for you?

There are limitations to such strategies.

Having a reliable income is a basic starting point. Being employed obviously helps, because of the employer contributions on offer.

It’s more challenging if you have dependants, be they children or elderly parents, says Photiou.

Anyone renting or paying off a mortgage has further outlay – especially high if they live in London or another major city.

“FIRE has clear appeal but works best for a specific group,” says King.

“In the UK, it favours higher earners who can save aggressively and benefit from higher pension tax relief, while keeping spending in check. At its core, it’s a simple mix of disciplined saving and smart use of tax wrappers like ISAs and pensions.”

So while the dream may be to kick back and relax for the next 40 years, the reality of ever achieving that looks quite different.

Recent years have thrown a series of cost-of-living challenges, with the majority of people undersaving and underinvesting.

Rules of thumb around optimal savings rates vary but assuming 8%-12% for a moderate retirement – based on a ‘normal’ retirement age, anyone hoping to retire sooner needs to do some serious budgeting.

In Australia, they suggest a 15% contribution rate, while in the US many suggest a ‘half your age’ savings rate (if you’re starting age 20, save 10% of your salary; if you’re starting at 30, 15%; those starting at 40 should save 20% and so on).

But these frameworks or ‘rules’ are blunt instruments, overlooking a multitude of factors.

Traditional retirement plans talk about a U-shaped expenditure path, with more outlay at the beginning, followed by a period of lower outgoings, which may pick up again if long-term care has to be factored in.

Photiou says: “The Australians call them the go-go years, the slow-go years and the no-go years.”

But if you’re looking at FIRE, you’ll likely be wanting more go-go, and less slow-go. So Photiou suggests a higher proportion of working life salary will be required.

Like the sound of FIRE?

L&G have kindly crunched some numbers for MoneyWeek using certain assumptions such as starting work age 22 and using the minimum, moderate and comfortable lifestyle costs as estimated by Pensions UK in its Retirement Living Standards.