The FIRE movement: is retiring early all it’s cracked up to be?

Supporters of the FIRE movement claim that living frugally, saving most of your income and investing wisely can lead to retirement at 40. We talked to wealth managers Stewart Sanderson and Olivia Newman from Brooks Macdonald about how realistic that claim is, and what financial independence really means.

Mariel Diez for Compare Wealth Managers

The 1992 best-selling book Your Money or Your Life by Vicki Robin and Joe Dominguez sparked FIRE, a movement that promotes spending as little as possible and saving up to 70% of any income. Followers of FIRE (Financial Independence, Retire Early) plan to retire much earlier than the traditional retirement age of 65 by saving and investing a much more significant proportion of their income. They can leave their jobs or permanently retire from all employment after their savings reach about 25 times their annual expenses, or around £1 million.

Do the experts think it’s possible?

Stewart Sanderson, a wealth manager and senior client director at Brooks Macdonald, is supportive of the central premise of FIRE – that people should start saving early:

I like the simplicity of people understanding that if you want financial independence then you have to do something about it, and the sooner you start doing something about it, the better. However, you could argue that this is no more than simply having a budget and building a plan.

The FIRE premise is not altogether simple though, and Stewart has concerns that a person’s views on retirement may shift throughout their lifetime: “The worries and motivations of a millennial are very different from a baby boomer. Throughout our lives our priorities change, so plans must adapt.”

Similarly, trainee private client adviser Olivia Newman applauds the movement’s broad principle - encouraging people to think about savings, investing, retirement and pensions at a younger age - but she also believes that early retirement is not the answer for everyone: “Having the goal to retire early is something a lot of people aspire to do, but if they’ve spent all their lives working, then going from 100 to 0 can be quite a change.” Instead, Olivia recommends scaling back workload gradually, to help ease the transition to retirement.

If you retire at 40, what happens to your pension pot?

As Stewart explains, if someone retires at 40 then they will miss out on contributions from age 40 to 60, when the pot is mostly likely to be growing: “When you’re 20 and you’ve saved £5,000, your compound growth is minimal because there’s little to compound. As you increase your wealth, that growth becomes more important, so if you skip pension contributions in later life then your pension after 65 could be very low.”

Olivia adds that the earlier you start thinking about savings and investment, the better, but she advises against taking a blinkered view of early retirement: “Many younger people set on retiring at 40 may not be thinking about their pension contributions, but by focusing solely on saving they’re forfeiting all the benefits of having a pension.”

Knowledge is power

Both Stewart and Olivia support the FIRE movement’s promotion of creating a financial plan - something many may never have thought of doing. Stewart says: "I applaud anything that’s simple, educational and engages people in the importance of taking control of their finances. The challenge is considering inflation, the impact of tax and changes in regulations. Those things are really important in planning how you want to organise your finances to last the rest of your life.”

Stewart advises talking to an expert before making any key financial decisions: “As Private Client Managers we can work with you to create a tailored financial plan and let you know if you can achieve your goals with what you’re doing now, or if you need to follow a different path to get there.”

It’s all about choice

The idea of saving and retiring early might motivate some, but others find work fulfilling. So, is FIRE delivering a healthy message? Stewart believes true fulfilment comes from having the financial freedom to choose what to do with the rest of our lives: “The biggest problem with FIRE is the risk that any money saved may run out, if any significant costs crop up or a person lives longer than expected. In my opinion, the greatest financial freedom comes from having enough money to choose how you want to live. Maybe you want to help your children with their education or with buying a house, or maybe you want to support a charitable cause. Financial independence hasn’t really got anything to do with the numbers – it’s about the freedom to do what you choose. That’s what makes people happy.”

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