Many people dream of retiring early to pursue their real passions before they get too old to enjoy them. Is it just a pipedream or could it be a reality for some people?

This feature explores the pros, pitfalls and practicalities of the so-called FIRE movement which is gaining increasing traction. A recent AJ Bell Money & Markets podcast discussion on the subject provoked a strong response from listeners which suggests the FIRE movement has struck a nerve within a certain cohort of investors.

Throughout the article we share a selection of the opinions and first-hand experiences of real investors who are, to a greater or less extent, part of the movement (though in the interests of their privacy, real names have been changed).

WHAT IS THE FIRE MOVEMENT?

The acronym stands for financial independence, retire early and it was born in the US more than 30 years ago after authors Vicki Robin and Joe Dominguez coined the phrase in their book Your Money or Your Life.

In its simplest form financial independence isn’t about being rich but having enough stashed away to provide financial security. It’s about taking back control and living on your own terms.

As one correspondent William explains: ‘Just about everyone retires at some point. There is nothing special about the dates set by the government or the actuaries. Plan your own. Financial independence allows you to choose what you want to do – that might mean continuing in the same job.’

While there is not one single manifesto or handbook for the FIRE movement there are several key principles underpinning it:

Save as much of your income as you can (potentially up to 70%);
Live very frugally (make do and mend, buy second hand, limit impulse purchases);
Pay off any debts, including your mortgage;
Invest spare funds in low-cost tracker funds to benefit from the returns of the stock market.

Many bloggers on social media pushing the FIRE movement make it sound easy to achieve but that does not paint an accurate picture. If you have children, for example, then putting a large chunk of your income aside may not be realistic.

For most people, the best way to think about FIRE may be as something you can take some inspiration from rather than follow religiously. The idea of squirreling away as much cash as you can is a good one. Going through your regular outgoings to work out where you could be making savings – even if it is only once or twice a year – is an excellent discipline to get into.

Paying off debts where you are able to is also a worthwhile goal, particularly in the current high interest rate environment, as is keeping your costs down when investing.

Some FIRE proponents do not give up work entirely, they may continue to work part time. The key ambition is to create a level of financial flexibility which allows you to make your own choices.  

ACHIEVING A PLAN TO RETIRE EARLY

Phil decided very early on in his career that he didn’t want to keep working until he was 65 and hatched a plan in his 20s with the goal of retiring in his 40s.

He knew he would have to put a good chunk of money aside each month to reach his goals. Fortunately, Phil was in a position where he only spent half of his monthly salary to maintain his lifestyle.

‘I never sacrificed experiences like holidays,’ Phil told the AJ Bell Money Markets podcast. For material things like an expensive car, he settled for a decent car instead.

Phil seemingly never missed an opportunity to squirrel away extra cash into his investment portfolio. Take his mortgage for example.

When he took the mortgage interest rates were 13% and although they subsequently fell towards 3% Phil maintained his higher repayments which meant he was able to pay off the mortgage in his mid-to-late thirties.

In turn this gave him more disposable income to add to his pension pot. Phil is now a few years into his retirement. Planning early and investing half his monthly salary has so far worked out well.

THE EXPERT VIEW

Director of public policy at AJ Bell, Tom Selby, says one of the most important aspects of an early retirement plan is the idea of sustainability. Making a realistic plan which provides security against life’s inevitable ups and downs is crucial to enjoying the benefits of early retirement.

It may seem an obvious point but bear in mind that if you want to retire before you turn 50, assuming you start work at 20, retirement may last longer than your working life.

The earliest someone can access their private pension is 55 which increases to 57 years of age from 2028. Someone retiring before that needs to find other forms of income such as ISAs and buy-to-let rental income.

The state pension is accessible from 66 years of age and currently stands at £10,600 a year. For investors planning further into the future it is worth pointing out that the state pension age increases to 67 from 2028 and 68 from 2046.

Selby reminds investors that the earlier they access a pension pot, the less amount of time investments have to grow and benefit from the compound returns offered by financial markets. Leaving a pension untouched for a further 10 years could make a considerable difference. For example, a pension pot growing at 7% a year will nearly double over a decade.

Some people may be able to live off the annual dividends and fixed income payments out without selling any investments. This leaves the capital in the portfolio unencumbered so it can keep growing.

The sizeable increase in interest rates over the last two years has made a big difference for investors seeking income.

AN IFA VIEW

Independent financial adviser Lena Patel says more clients are asking if they can retire early.

Before launching into cash flow modelling and looking at levels of income Patel asks clients to define what early retirement means for them.

‘It is important to have a vision of what retirement means,’ says Patel. The reality is that people don’t think much about what makes them happy and how to lead a fulfilling life after stopping work.

Patel believes more education is needed and could be provided earlier on in life to encourage people to make plans for how they want to live later.

Putting cash away which is attached to reaching specific life goals is more powerful than simply encouraging a client to feed their pension pot. Making sacrifices are easier to stomach when they are attached to non-financial rewards.

Happiness for some people means slowing down and working part time rather than stopping altogether. For others it may involve going on more holidays or pursuing latent passions.

As always, personal circumstances play a big role is shaping what is possible. Those with children at school or university are in a completely different situation to single parents.

Patel believes the FIRE movement has legs with more people looking to take control of their own futures as the retirement age is pushed further into the future. 

IGNORE DIVERSIFICATION AT YOUR PERIL

Investment performance is an important ingredient in achieving financial freedom. Whatever an investor’s risk appetite, it rarely pays to ignore the benefits of diversification.

Spreading investments across different companies, sectors, geographies, and assets reduces overall portfolio volatility. One of our previous examples, Phil, has a cautionary tale which underlines the risk of putting too many eggs into one basket. Intent on putting as much as he could into his investment portfolio Phil added to an already generous company share purchase scheme.

The company he worked for was then taken over by US security systems company Tyco International in an all-share transaction. He had no idea what was about to happen next, but the company became embroiled in one of the largest fraud scandals in the US in the early noughties.

CEO and chair Dennis Kozlowski and finance chief Mark Swartz were prosecuted for stealing $600 million from corporate coffers and subsequently went to jail.

The shares that Phil owned plunged almost 80% overnight and it taught him a lesson about the virtue of spreading his investments and the pitfalls of too much concentration.

ENJOYING RETIREMENT IN SPAIN

Andy is 63 and his wife is 62 and they retired 11 years ago to relocate from the UK to Spain. They maintain a good lifestyle living off the income generated from SIPPs, offshore Spanish-compliant bonds and pensions from previous employers.

‘We have managed to live within our income generated from these sources and our assets have still grown from our original inputs. We look forward to receiving our state pensions in a few more years but see this as a bonus and not something to be relied on,’ says Andy.

WHY RETIRING MAY BE HARDER THAN YOU THINK

People will always find ways to fill their time, so boredom is rarely a factor but dealing with the mental side of retirement should not be taken lightly. Phil said he found it difficult in the first few years after stopping work and did some part-time jobs to help him cope mentally. It was less about the lost income and more about the loss of his professional identity.

‘I can’t emphasise enough it is a tough transition,’ cautions Phil. Spending years developing professional skills which are then ‘tossed away’ could feel like the equivalent of a physical loss.

Another early retiree, Jeff, had a similar experience saying he ‘missed work’ in the first few months after retirement in 2021. ‘Too much time on our hands. Summer is fine, not so much the winter months,’ laments Jeff.

‘Our experience over the past two years, is less with financial worry, but more to do with being active as we have been our whole lives. Yes, we are holidaying more but we find we don’t wish to go on endless cruises.’

ROY TAKES RISKS TO ESCAPE THE RAT RACE

Roy is in his late 60s and quit the ‘rat race’ in 2012. He started investing in the 1990s. The 1997 Asian financial crisis which began in Thailand before spreading to other countries and raised fears of a global financial meltdown.

UK bank shares got caught in the crosshairs and Roy borrowed half a year’s pay to buy shares in Barclays (BARC) and NatWest (NWG).

His thinking was that ‘at worst’ he would be paying an affordable loan for a few years. In the event, Roy made an 80% profit in around nine months.

Roy repeated the same trick a few years later during the dotcom bust and once again borrowed half a year’s pay to put into the stock market. He walked away with a 110% profit in 18 months.

Looking through the rubble left by the collapse of the split capital investment trust market Roy was able to pick up some amazing bargains as the survivors were paying huge dividends while growing underlying capital.

After the 2007/8 financial crisis Roy was able to pick up UK housebuilders Taylor Wimpey (TW.) and Barratt Developments (BDEV) on the cheap and made around 150% over two to three years.

Roy’s last big gambit came in 2014 when he sank a whole year’s net pay into online fashion retailer Boohoo (BOO:AIM) around three months after it listed on AIM via an IPO (initial public offering).

Within a few months Roy was staring at a 50% loss after the company disappointed investors in its debut trading statement. Roy decided to ‘tough it out’ and three years later sold out for a 300% profit.

Most of the proceeds were used to repay his buy-to-let mortgage which today provides Roy with a 4.5% annual yield on its current value and 12% on its purchase price. It is worth saying the risks Roy took would not be suitable for most investors and investing with borrowed money is never advisable.

Roy describes himself as being in the middle band of the FIRE community, which he says is between subsistence and overt wealth.

HOW MUCH IS ENOUGH?

Our earlier contributor Phil knows how much income he needs each year and if everything goes to plan, he expects his pension pots to run out of cash when he reaches the ripe old age of 104. (See the section on life expectancy to get an idea of Phil’s odds.)

That may seem like an optimistic scenario in one sense, (living a long life) but cautious in the sense Phil could potentially spend more cash each year.

Here it is worth repeating Tom Selby’s wise words on sustainability. Phil’s plan provides peace of mind even in the event of some unexpected bills.

The rule of 25 is a popular method used by some investors to estimate when they have enough to retire. It says an investor needs a pension pot which is 25 times future expected annual expenditures.

US financial advisor William Bengen devised the plan based on a 30-year retirement time frame. It may not be suitable for investors retiring at 40 who expect to live into their 80s.

The idea is that taking 4% out of a pension pot each year will see it last around 30 years. It has the advantage of being easy to understand. As an example, an investor targeting an annual income of £40,000 a year before tax in retirement would need a minimum £1 million portfolio (£40,000 x 25).

On the other hand, there are no guarantees. Bengen’s original analysis showed it worked about 90% of the time. It also makes no distinction between withdrawing income and capital. Selling shares to take income reduces the capital value of a portfolio and reduces the future level of income, everything else being equal. Another wrinkle to consider is the rising cost of living.

A portfolio which grows above the rate of inflation maintains the spending power of the income that is generated and allows a retiree to keep up with rising costs. Until the onset of the pandemic, inflation had been negligible for more than a decade. That has since changed dramatically and today inflation is a significant factor to consider.

Let’s say inflation remains at around 4% a year for the next decade. In effect, this will reduce the real value of a pension pot by half.

Dean is a reluctant member of the FIRE movement having been forced to retire early due to being made redundant at the start of the pandemic.

‘Expect the unexpected, black swan events are now not uncommon,’ cautions Dean.

‘Do a worst-case scenario cash flow statement and then sense check it. If I have done a cash flow analysis in 2020 or 2021, I certainly would not have accounted for the price of food to have risen 30% (between October 2021 and October 2023) and still be rising at over 10%.’

‘No wonder these FIRE bloggers are young – they are also naïve – I suspect they just want to make money and haven’t really understood middle age,’ says Dean.

James is 43 years old and achieved FIRE in 2021 and moved his family from London to the countryside which freed him of the mortgage. Plans to stop working have been put on the backburner for now.

‘With the current period of high inflation, our annual expenses have risen a lot and our pot is no longer big enough to see us all the way to the end (using the 4% rule).

‘I see having a good job as an excellent offset to high inflation so have decided to carry on doing four days for the time being,’ adds James.

FACTORING IN LIFE EXPECTANCY

New data from the ONS (Office for National Statistics) shows that average life expectancy for both men and women in the UK has dropped significantly since the pandemic.

Life expectancy at birth was 78.6 years for men and 82.6 years for women in 2020-to-2022, down from 79.3 years for men and 83 years for women in 2017-19.

This means life expectancy at birth has dropped to the same levels seen in the period from 2010 to 2012 for women and slightly below for men over the same period.

The same change has been seen in life expectancy for people aged 65 which has fallen by 22 weeks and 15 weeks for men and women respectively.

It is unclear if the previous growth trend will reassert itself but with scientific advances in healthcare coming thick and fast, it would be unwise to bet against it.

In 2020, the number of people reaching 100 increased 20% from the prior year to reach a new high of 15,384 souls. Over the prior two decades the number of UK centenarians has increased by 58%.

DISCLAIMER: AJ Bell, referenced in this article, owns Shares magazine. The author (Martin Gamble) and editor (Tom Sieber) own shares in AJ Bell.

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