What is The Fire Movement?
Financial Independence Retire Early (retire early is optional!).
This is your end goal. To be able to live off the passive income from your investment portfolio without the need to work - or with the freedom to do whatever type of work you want without worrying about the salary it pays.
If you Google Financial Fire or The Fire Movement, you will find lots of information mainly from sources in the USA. This lifestyle model became popular in the 2010s, gaining traction through online communities via information shared in blogs, podcasts, and online discussion forums. Those seeking to attain FIRE intentionally maximize their savings rate by finding ways to increase income and/or decrease spending, along with passive investing. The objective is to accumulate assets (Equity & Bonds) until the resulting passive income from price growth, dividends, and interest, provides enough money for living expenses throughout retirement.
In the post What is the 50/30/20 budget? we discussed saving 20% of income, but this is not a ‘hard and fast’ rule. Some proponents of the FIRE movement save up to 50% of their income to achieve financial independence within 15 years!
What is the 4% Rule?
Say you want to FIRE at age 50, you need to build up a portfolio net worth of 25 times your estimated annual expenses. You can then withdraw a maximum of 4% from your pot each year; this is known as the 4% Rule. It states that you can withdraw 4% of your savings in your first year of retirement and adjust that amount for inflation for every subsequent year without risking running out of money for at least 30 years in 90% of historical models.
So, if you want to retire at 50 with an income of £20,000, you will need a portfolio of £500,000 (£20,000 x 25) to provide that income (4% of £500,000).
If you are happy to retire at the UK state pension age (currently age 67), we are lucky to still get a state pension which is approx. £8,000 pa. So, for a couple receiving a state pension of £16,000 and a required income of £20,000 at retirement, the portfolio can be reduced to £100,000.
There are many calculators on the internet that can help you work out how much you need to save each month to get to a specified lump sum in a specified number of years; or how long it will take to reach FIRE if you save a specific amount every month.
For example, Anna is 25 and wishes to retire at age 55 with an income of £20,000pa which requires a portfolio of £500,000. Using an online calculator we can work out that Anna will have to save around £400 per month over the 30 year period with average compound growth of 7% pa.
This may sound impossible, but if you take into account the tax return from investing in a pension and the potential employer contribution, this monthly amount could be reduced to £160! Compound interest does the rest!
Also, don’t forget that your income will most likely increase over the 30 year period and you will be able to increase the amount you save. You could also factor in the state pension which further reduces the amount you need to save.
Traditional & Coast FIRE
There are different versions of FIRE that may suit your goals. Traditional FIRE as above is about saving enough to stop working and live off the income provided by your portfolio from that point onward.
Coast FIRE is about having enough in your investment portfolio that without any further contributions, it will grow over the remaining time to support retirement at a traditional retirement age.
If you save and invest money early in life, your portfolio will reach a point where you can allow your investments to compound over time and grow to be enough to retire at a traditional retirement age. Once your portfolio net worth value has reached this point, the Coast FIRE milestone, you still need to earn income to cover your monthly cost of living, but you no longer need to save money for retirement.
This strategy of "Coasting to FIRE" gives you the freedom to pursue a different job that pays less, move to working part-time, or just have more spending money to enjoy life.
Being financially independent and not having to work, living off a passive income, is our end goal. Understand how the 4% rule works and calculate how much you need to save to achieve this goal!