- The FIRE (Financial Independence, Retire Early) movement promotes extreme planning for early retirement
- It has garnered plenty of followers, but there are seven reasons why it could prove a difficult pursuit for some savers and investors
- Savers may want to consider an alternative which is more realistic and achievable, and can still get you the retirement you want
- AJ Bell has devised the ‘SPIRIT’ (Spark, Persevere, Increase, Revisit, Invest, Tax efficiency) movement for those more inclined to pour cold water over FIRE
Sarah Coles, head of personal finance at AJ Bell, comments:
“The ‘FIRE’ movement – also known as ‘Financial Independence, Retire Early’ – is an extreme form of planning towards very early retirement in your 30, 40s or 50s. It’s based on severe cost-cutting, adopting a frugal lifestyle, and saving up to 70% of what you earn. The aim is to build up a pot worth 25 times your annual expenses, and then withdraw it at 4% a year, so it lasts for life.
“However, there are seven reasons why the approach is difficult to start and likely to be near impossible to live with for some pension savers. If FIRE isn’t for you, you could consider a more realistic alternative – the SPIRIT movement – which can get you the retirement you want, when you want it, without breaking your spirit.
- You have to be incredibly disciplined
“It’s based on extreme frugality while you’re working and saving. Most people will find this impossible to stick to for the decades they’re working, so they build a life around a philosophy they can’t maintain.
- You miss out while you’re young
“Even if it’s possible to stick to the lifestyle, not everyone is going to want to spend their 20s and 30s avoiding all unnecessary luxuries or experiences. If they’re opting for the lean version of FIRE, they also have an extremely frugal lifestyle to look forward to in retirement.
- Rent makes this incredibly difficult in the UK
“In the UK, the average renter spends more than a third of their income on putting a roof over their head, so to spend significantly less you may need to live with family, room share, or live somewhere more unusual like a caravan or van. This isn’t for everyone.
- You also need to consider property in retirement
“If you don’t want to live in a van in retirement, you either need to save hundreds of thousands of pounds to cover rent, or you need to buy a property far earlier than the average person and pay the mortgage off fast. It’s hard to see how this is achievable if you are putting most of your income away for the future.
- You may not qualify for the full state pension
“For the full new state pension, you need 35 years of National Insurance contributions or credits. If you don’t plan to work for that long, you’ll get a smaller pension – and if you work for fewer than 10 years you won’t qualify for a state pension at all.
- It uses punchy growth assumptions
“The rules generally assume a growth rate of 7% for your investments, so you will need to consider holding more equities. This comes with more risk, so you need to be comfortable with that.
- The withdrawal rate comes with risk
“It assumes you withdraw 4% per year. This is close to historic average returns, but it doesn’t account for the times when your investments don’t make 4%. Sequencing risk means if this happens early on, you might need to eat into capital and never recover from a fall. It means you need a savings safety net of one to three years’ worth of spending too – on top of your pension pot.”
The SPIRIT movement
“This is based on six foundations of effective retirement planning:
Spark
“It all starts with a spark and the sooner you get it started, the better, because the more opportunity your investments have to benefit from compound growth.
“You can be automatically enrolled into the pension scheme at work from the age of 22, but as soon as you start earning, you can ask to join the pension scheme at work. As long as you make at least £6,240 a year, when you pay into the pension scheme, your employer has to pay in too.
Persevere
“Life can be lumpy, so there may be times when you take a career break, move to part-time work, or face financial challenges that mean you need to tighten the purse strings. In any of those circumstances, try to start from the position that ideally you should keep paying into your pension. If you have a partner, you can talk to them about how you might manage money as a household to make it possible.
“If you go on maternity leave, it can be tempting to pause contributions because money tends to be tight. However, if you can keep up payments, you only have to pay a percentage of the actual maternity pay you’re getting, while your employer needs to keep making the same contributions as before.
Increase
“You don’t have to contribute a fortune from day one, just make a start with whatever you can afford, and pledge to increase pension payments every time you get a pay rise. You might also commit to paying more in when you get any extra cash, whether that’s from working longer hours, a bonus or any other lump sums.
“It can help to commit to a specific percentage of salary, so your contributions automatically rise with your income.
Revisit
“Don’t think of this as something you do once and then ignore. You should take a look at your pension at least once a year. Consider the retirement income you need and use a pensions calculator to see if you’re on track or need to boost contributions.
“It’s also a sensible idea to revisit your plans more generally, and consider how, when and where you want to retire, so you know the income you’re aiming for is right for the lifestyle you want.
“If you decide to phase retirement and work a little in the early years, planning ahead will give you the chance to consider the kind of work you want to do and whether you need any retraining or financing to get you started.
Invest
“When you put money into a pension there are three levers you can pull – how much you pay in, how long you pay in for, and how you invest.
“Most people don’t make a decision about investment, so their pension ends up in the default fund, which may be fine for the average person. However, getting to grips with investments and making active choices gives you the chance to make sure your investments are right for your needs. It’s a chance to get your money working harder for you.
“In a workplace pension you’re likely to have limited choices, but in a SIPP there’s a huge opportunity to tailor your own portfolio. Using free pension finder services to locate and consolidate any pension pots you’ve left behind from previous jobs can often give you more control over charges and investments, all while benefiting from any compound investment growth for the entire pot.
Tax efficiency
“Pensions offer significant tax benefits, especially on contributions, because you get tax relief at your highest marginal rate. Within some pensions this is done for you, but when it’s a personal pension or SIPP, higher and additional rate taxpayers will need to reclaim the extra tax from HMRC – by contacting them or filling in a tax return.
“Growth is also tax free within the pension, which helps your investments build, and means you don’t need to worry about tax admin as you go along.
“When you take an income, you can take up to 25% of it tax-free and manage the withdrawal of the rest as tax efficiently as possible. If you’re using drawdown, you can time withdrawals to keep you under a tax threshold. If you have a Stocks and Shares ISA or Cash ISA alongside your pensions, you can use a mix and match approach to keep your tax bill down.”
