The FIRE movement: everything you need to know about retiring early

Important: This information is for guidance purposes and may become out of date at any given time. It is not investment advice. Investments can rise and fall in value. We won’t make any assessment of whether the investments you choose are appropriate or suitable for you. If you are unsure of the suitability of any investment, investment service or strategy, you should seek independent financial advice. Past performance is not a reliable indicator of future results. Capital is at risk. Tax treatment will depend on your individual circumstances and could potentially change in the future.

Have you ever wondered what it would be like to retire in your 50s? Or even your 40s? The idea of being retired for more than half your life might sound like a pipe dream, but for advocates of the FIRE (Financially Independent, Retire Early) movement, they’ve turned that dream into reality. Here, we discover the formula for FIRE and discover why it’s far less complicated than you might think.

What is the FIRE movement?

Originating in the US, the FIRE movement’s core principles are often traced back to the 1992 book Your Money or Your Life by Vicki Robin and Joe Dominguez. Dominguez was a Wall Street analyst who retired at the age of 31 and shared his FIRE formula for success.

In a nutshell, FIRE is about keeping your outgoings as low as possible and investing or saving as much as you can, thereby generating capital that works to generate more money.

Once the money this capital generates exceeds your expenditure, you have achieved Financial Independence (FI) and could, if you wished, retire early (RE).

The promise of early retirement is an eye-catching headline that increased the FIRE movement’s appeal. However, many advocates of FI don’t just view early retirement as the end goal; rather, it’s about freedom from financial stress and the ability to choose when and how you work.

The steps you need to take to reach financial independence

Alan Donegan and his wife Katie both retired by the age of 40. Now, they split their time between Basingstoke in the UK and travelling the world running their Rebel Finance School, which offers free courses for people who wish to become financially independent.

Saving enough to retire this early isn’t easy, but they took a lot of positives from the financial discipline it required:

“Lots of people think that financial independence is deprivation,” says Alan, “as if you have to ditch any pleasure in your life for future pleasure. But it never felt like that to us. It felt like a game. Like you're playing with Nectar points and going, ‘how many nectar points can we get?’”

Mr Money Mustache (MMM), who Donegan calls “the main man of financial independence”, is full of tips on how to minimise spend, maximise savings, and other tips on how best to manage your money. A few highlights include:

• Reducing your commute. MMM calculated that a 40 minute commute can cost £98,200 over 10 years. Cycling or walking to work alone can save £2360 per year*.

• Reducing grocery spend by meal planning and cutting down on food waste.

• Building sweat equity in your home by performing as much maintenance work yourself as possible.

Could I really retire at 40 with the FIRE movement?

The short answer is yes. The longer answer is that it requires discipline, but it’s certainly possible. Let’s assume that you’re entering full time employment at 21 years old, and you earn the median UK income. As of January 2024, that’s £28,000. According to the Salary After Tax calculator, this yields an annual take-home salary of £23,064.

The Pensions & Lifetime Savings Association (PLSA) says that the annual spend required for a ‘Minimum’ standard of living (which covers all your needs, with some left over for fun) is £12,800 per year. Assuming you’ll spend that exact amount both before and after retirement, you can save £10,264 per year, and will need to accumulate £256,600.

A quick glance suggests it will take over 25 years for you to reach FI, which would put you in your mid-40s. Not bad, but not what we were aiming for. However, there’s another important factor to consider: compound interest.

From day one, your capital works hard to generate more money for you. Let’s assume, as above, that your investments will earn an average of 4% interest annually - compound interest.

By adding this factor into the mix, if you start saving at 21, you could be generating almost £5,000 per year in interest alone by the time you’re 31. Fast forward to your late 30s and the table looks like this:

In other words, if you start saving £10,264 per year at 21 years old, you’ll pass the minimum FI threshold (£256,600) aged 38. By the time you turn 40, you could have already been retired for a year.

How about retiring at 55?

That said, the “game” the Donegans and Mr Money Mustache played might not be for everyone.

For many, £12,800 per year is not a comfortable existence either before or after retirement. So, what does the maths look like if we allow a higher standard of living (post-retirement) and a longer amount of time to accumulate capital?

The PLSA says that a ‘Moderate’ standard of living (with “more financial security and flexibility”) costs £23,300 per annum, so this would require savings of £582,500.

Assuming the same income levels as before, this is how things look 30 years after you start saving:

In other words, if you start saving at 21, you’d pass the threshold for a Moderate standard of living in your retirement aged 51. If you continue working until 55, the maths looks like this:

Factor in pension contributions that will start paying out in your mid-late 50s, and you could be on course for a long and comfortable retirement.

Factoring in inflation

One major factor that isn’t covered here is inflation. The 4% rule accounts for inflation: on average, the S&P 500 returns 10.1% annually, but this figure falls to 6.4% once adjusted for inflation.

This is partly why FIRE advocates favour broad stock market trackers; their returns typically increase in line with inflation (unlike bonds)**. It’s important to note that while these returns have materialised historically, there are no guarantees that they will in future.

While the details are too complex to go into here, the bottom line is that as long as your income and savings contributions increase in line with inflation, the underlying maths shouldn’t change. So: whenever your income increases, try to scale the amount you save, so that the proportion of your income saved remains constant.

How is FIRE different from pension contributions?

According to the latest ONS data, between April 2018 and March 2020 the median amount of wealth in pensions not yet in payment among UK citizens was £32,700. This varies considerably by age group, as below:

Pensions are, of course, an important part of retirement planning, and come with a range of tax benefits compared to other forms of saving. However, FIRE advocates put the majority of their savings into different types of account for one important reason: pension funds only become accessible at retirement age (currently 55 in the UK, but rising to 57 in 2028). Tax-efficient accounts include self-invested personal pensions (SIPPs), individual savings accounts (ISAs) and lifetime ISAs (LISAs).

If you want to retire before this, you will need a substantial amount saved in an account you can access at any time.

FIRE advocates, including Donegan, favour broad stock market trackers (typically via ISAs), because these tend to generate relatively low-risk returns over a long time period. “We go for the most passive type, which is a global tracker. We don't choose countries, we just invest in the entire market,” he explains. Pension funds may include stock market trackers but will also typically include other asset classes such as bonds, private equity or real estate investment trusts (REITs).

FIRE advocates will also take two other steps towards FI that go beyond regular pension contributions:

• They will accumulate an emergency fund worth 3–6 months’ salary in an easy access savings account

• They will take steps to pay off their mortgage, and generally minimise debt, to prevent repayments eating into their disposable income during retirement.

Do you need a high salary to make FIRE work for you?

One of the criticisms of FIRE is that it relies on having a high level of income to begin with. However, as the calculations above show, the median salary can bring someone to the point at which they can seriously consider retirement in little more than twenty years, if they’re prepared to save hard.

“There are thousands of examples of people who've done it on teachers’ salaries and lower paid wages,” explains Alan.

Similarly, it’s natural for anyone already in their 30s or over to look at the tables above and conclude that they’ve left it too late to aim for early retirement. Donegan believes this misses an important point about FIRE, specifically the financial freedom / independence part.

“Something like 40% or 50% of people in the UK can’t survive a £400 emergency without going into debt,” he says. “Just having a fully stocked emergency fund will change your life and give you a level of security over money that will help you sleep better and feel less stress.” In other words, FI (financial independence) isn’t all about RE (retiring early). Applying the principles can improve anyone’s life, at any age.

Robin, inspired by his approach, left a career in film and theatre to co-found the New Road Map Foundation with Dominguez.

His simplest nugget of advice, and one which he repeats frequently, is “pay off all your debts, then throw it all into the Vanguard index fund“. The fund in question — the Vanguard Total Stock Market ETF [VTI] — is favoured because it has a very low expense ratio (0.03% as of 28 April 2023) and because the issuer, Vanguard, is structured as an investor-owned entity, “meaning its responsibility is to YOU as opposed to an outside group of shareholders”.

Saving, however, is more important to MMM than wise investing. He makes the point that a good investor (like Warren Buffett) can make four times as much as an average one, but that a good saver can make ten times as much as an average saver.

These steps will both lengthen the amount of time it will take to accumulate enough savings to retire; however, these considerations are offset by the fact that the calculations above assume no increase in income over time. They are important steps to take in the journey towards FI.

FIRE Formula

Getting down to the numbers, FI relies on accumulating enough stored capital for its interest to equal or exceed your expenditure.

Assuming that a portfolio can consistently generate 4% returns per year — known as the ‘4% rule’ — this implies that you put aside 25-times your annual outgoings. In other words, for every £1 you need or want to spend annually once you retire, you need to save £25.

Someone who spends £20,000 per year would therefore need to save £500,000 to achieve FI. If you spend £40,000 per year then you’d need £1m saved in order to retire, but those who can manage on £10,000 could retire on just £250,000 savings.

At these levels, retirees can theoretically live entirely on the interest their portfolios generate, without eating into their accumulated savings. Their pot will last forever, regardless of how early they retire.

*MMM wrote in 2021 that these approaches could save $125,000 over ten years and $3,000 per year respectively. These figures have been converted to GBP using exchange rates on 26 January 2024.

**For more information see https://www.ourrichjourney.com/post/how-high-inflation-impacts-your-fire-journey-and-how-you-can-beat-it