FIRE 101

This is a plan to get you in a position where you no longer need to work.

I can’t know what your specific goals are, or your age, earnings, or family situation, but the methods described here will work for anyone seeking to improve their financial situation.

Financial Independence means you don’t have to work.

We use index fund investing - requiring no special skill or knowledge about shares. We try to throw a lot of our earnings at this so that they grow quickly and free us from our day jobs, giving us the freedom to retire very early if we want to.

Eventually we reach a position where the earnings from our shares are enough to cover our living costs - we call this Financial Independence.

How long will this take?

The short answer is: typically people do this in 10 to 15 years.

That may sound like quite a long project, but remember you’re hacking your normal working lifetime which would normally run from 20ish to State Pension age at around 68. If you begin FIRE in your 20s then you could retire in your 30s with decades more freedom to use while you’re in good health. Ths aim is to build up investments which could sustain you without having to wait for your state pension.

The slightly longer answer is that you need to build up investments of about 25 times your annual spending. That’s because you can safely withdraw about 4% from your portfolio (jargon for “pot of money”) each year. Later on we’ll look more closely at this 4% figure, but it works as a rule of thumb for now.

That “25x” goal is helped a lot by the power of compounding - the fact that your pound begins to breed more pounds and they themselves go to work for you. It means that you don’t have to go out and earn all of this savings pot. This can halve the time it takes - you’d expect to get to 25 years worth of savings in more like 12 to 15 years, because of compounding.

The other way we’ll try to speed up this process is by looking at the other side of this “25 x spending” equation. We’ll consider ways to cut your spending. Being less spendy works twice over - it frees up more money from your wages to invest at a faster rate, but more importantly it also brings your target future spending figure down.

A lot of people come to FIRE later in life, and it’s useful for them too. You can learn to sharpen your investments, and to figure out goals and know when you can safely retire. A lot of older people come to FIRE with some wealth already, which can speed things along.

Free Money!

The government is actually on our side here, as they want us to be good savers and to be able to support ourselves in retirement, so there are some incentives we can use which supercharge our savings. If we save into a personal pension, and make our investments from inside of there, the government will give you your tax money back on those contributions to add to the pot. This is at least a 25% boost.

You’re probably already an investor in the form of a workplace pension, and we’ll look at ways to improve this, by trying to reduce fees and improve the funds it’s invested in.

Pensions have the limitation that you can’t get at the money inside until you are in your late 50s, but then even if you’re trying to retire in your 30s you still need to fund those later years, so it forms a valuable part of your plan.

Reaching FI

When you finally reach that magic target figure you have reached Financial Independence, or are said to be FI. You could hang up your boots and retire, spending your day in a hammock watching daytime telly.

There is plenty of controversy around retiring very early. Sometimes people criticise FIRE, and this seems to boil down to them deriving their sense of status from their work, and feeling threatened somehow. No-one is saying that you have to retire, just that it’s great to achieve freedom so that you don’t have to work unless you’re enjoying it.

Indeed, once you get even part-way along the FIRE path you’ll have the wealth to be able to sustain yourself for a number of years if things went wrong at work. You could afford to leave a job and spend some time retraining, having a break, whilst you seek a new job. Or just throttle back from a stressful career and work part-time (known as “Coast FIRE”), or in a less well paid but more enjoyable job (known as “Barista FIRE”).

When freed from the need to work, most people come up with ways they’d like to spend their time - rather than the stereotype of just tending their garden and watching daytime tv! A more-youthful-than-normal retirement means that you could indulge in a passion for world travel, or dedicate yourself to a useful project which just isn’t very lucrative. You could learn an instrument and play in a band, learn languages, or volunteer at projects that you feel are worthwhile.

FIRE is ultimately about freedom. It can be daunting to get on top of your finances and set about creating an investible gap between your earnings and your spending, but lots of people find it rewarding and feel they finally have a mission they’re working toward.

 Continue to Measuring Your Wealth