How to retire early: The FIRE movement - Times Money Mentor (2024)

Retiring in your thirties or forties might seem like a pipe dream, but that’s the goal of some young workers who are following an extreme savings movement known as the Fire method, which stands for financial independence, retire early.

Some of these young workers set aside as much as 70% of their income each month and invest it, minimise their outgoings and rush to pay off any debt, such as a mortgage – all with the aim of being able to retire early.

Even if you think some of the measures taken by Fire savers are a bit too much for you, adopting the general principles could shave years off your expected retirement age.

In this article, we explain:

• What is the Fire movement?
• How much do I need to retire at 40?
• How much do I need to retire at 55?
• Should I open a pension, Isa or both?
• Can I afford to retire?
• Tool: Are your retirement plans on track?

Read more: ‘I retired at 52 with a tax-free income of £18,500 a year’

What is the Fire movement?

Fire stands for financial independence, retire early. Fans of the Fire movement adopt extreme saving techniques in order to obtain financial freedom.

While early retirement is the goal for some Fire savers, for many it’s about having the choice to decide when they work. For some it’s as simple as the freedom to afford to work part-time.

The Fire movement started in the US but has a growing fan base in the UK. Its main ideas originate from the 1992 book Your Money or Your Life by Vicki Robin and Joe Dominguez.

The aim is for you to retire before the age of 55 by:

• Being frugal enough to set aside a big proportion of your earnings
• Generating an income in retirement through cheap, passive investments

The Fire movement appeals to those who:

• Want to give up work
• Are dissatisfied with consumerism
• And want to gain financial independence

The Fire movement drew in new followers during the pandemic as people reassessed their lives during lockdown and started saving more of their income.

However, the cost of living crisis has turned this on its head. Many people have been spending more on household bills in the last two years, leaving them with less disposable income to save and invest.

While this doesn’t make it impossible to retire early, it certainly makes it a lot harder.

Read more: Should I retire early? The pros and cons

What are the principles of the Fire movement?

The Fire movement involves:

• Saving as much of your income as possible (up to 70%)
• Living exceptionally frugally
• Paying off all your debt, including your mortgage
• Investing in cheap funds that track the stock market

Read more: ‘I’m a Fire saver and plan to retire at 38’

What is the formula used by Fire movement savers?

Many followers of the Fire movement use a formula to help them build up a pot that is big enough for them to stop work.

This is how it works:

• You need to build up a net worth of 25 times your estimated annual expenses and spending to achieve financial independence
• You should then withdraw a maximum 4% from your pot each year

So for example, if you expect to spend – not earn – £20,000 a year when you retire, you will need a savings pot of £500,000.

Once you have retired, you then only withdraw 4% of this (£20,000) annually from the pot.

Part of the Fire plan also requires you to balance a number of elements:

• You need to have an emergency savings pot of three to six months’ worth of salary set aside (put this money in an easy access savings account)
• Grow your savings by investing, typically in cheap tracker funds that mimic the performance of the stock market
• Owning your home outright is an important element too; this is because retirees will have more disposable income if they have already cleared their mortgage

From a personal finance perspective, the basic principles of the Fire movement make a lot of sense.

Is it possible to retire in your 40s?

Yes, but it’s not easy to get to that point. You need to be incredibly disciplined and make big sacrifices while you are young. It also helps to have a well-paid job.

Retiring early requires some luck too; the Fire movement’s rise in popularity coincided with a sustained bull run on the stock market, which has boosted the investments of Fire fans.

If big sacrifices don’t appeal, you may prefer a lower level of Fire saving while living a more normal lifestyle.

After all, the basic principles of the movement – save and invest – make good financial sense for everyone.

It’s always a good idea to have a retirement plan so you can check that you’re on target to meet your goal. You should regularly review your plan in case the circ*mstances have changed.

New to investing? Read our advice on how to invest £10,000. For inspiration, find out how Tom expects his Isa and pensions to help him retire at 40.

How much do I need to retire at the age of 40?

You have to figure out how much you are likely to need to spend every year once you retire, which gives you an idea of the pot you need to accumulate.

If you want to retire at the age of 40 with an income of £20,000, you need to multiply this by 25. This means you need a pension pot of £500,000.

To reach this size pot, you would need to save £16,465 a year from the age of 21 to 39, according to figures from pension provider Royal London.

Of course, how easy or feasible it is to save this amount of money will depend on your earnings. For example:

• If you earn £30,000, you would need to save about half of it every year
• But if you earn £70,000, you would need to save about a quarter of your income

Royal London’s figures assume:

• 5% investment growth each year
• A constant salary
• Annual investment fees of 0.5%

Sarah Pennells, consumer finance specialist at Royal London, says: “Whether retiring before you’re 50 is feasible depends on the financial sacrifice you’re prepared – and can afford – to make.

“But it also means you’d have to build up savings outside your pension, because you can only take money out of your pension once you’re 55, and that age is due to rise to 57 in April 2028.”

REMEMBER: This means you would have to use other types of investments, such as a stocks and shares Isa or buy-to-let property.

We outline the main rules in our pensions guide.

If you are shopping for a stocks and shares Isa, see which ones have been given top marks according to our independent ratings.

What are the steps to Fire movement’s early retirement?

1. Save

Most Fire savers put aside between 25% and 50% of their income every month.

In order to save this level of money, you might need to identify essential expenditure and make some lifestyle changes. You could try these money-saving tricks.

You also need to decide where to put your savings. Most Fire savers will invest using a tax-efficient product such as a stocks and shares Isa.

2. Pay off debt

You’re typically able to overpay up to 10% of your mortgage balance without penalty each year. But terms vary widely, so check with your lender.

Fire savers aim to be mortgage-free when they retire. Overpaying can shave years off your term and slash how much interest you pay.

2. Invest

If you leave your money in a poorly performing savings account, it will be eroded by inflation. You need to invest it instead to give your savings the best chance of growing.

Most Fire savers invest in low-cost tracker funds which mimic the performance of a stock market. You should use a stocks and shares Isa to shelter your investment returns from the taxman.

3. Earn more

It’s not all about saving. The next step would be to try and boost your income.

This could include:

• Taking a part-time job or extra consultancy work
• Asking for a pay rise
• Changing to a job with a better salary
• Starting a side business
• Retraining for a better paid position

4. Spend wisely

Think carefully before buying anything. Many Fire savers avoid luxury items and save money in any way they can. That might mean stopping that takeaway coffee habit, avoiding Pret sandwiches, only buying clothes when necessary from charity shops and limiting holidays.

You might choose to adopt a more frugal lifestyle by, say, only buying secondhand, writing a meal plan, or fixing items before buying anything new.

You could use the money you save to pay off your mortgage more quickly or invest it.

Why not give these money-saving tricks a whirl.

How much do I need to retire at 55?

Some Fire savers think 40 is too young to stop working but are using the principles to retire in their early fifties instead.

Many people retire after they reach state pension age, which is currently 66, so retiring in your fifties is still considered early retirement.

If you want to retire at 55, again with a pension pot of £500,000, you need to save £6,215 a year from the age of 21, according to Royal London.

• If you have an annual salary of £30,000, you would need to save 20% of your pay cheque
• With an annual salary of £70,000, you would need to save 9%

Bear in mind that you usually can’t access your pension pot until the age of 55, rising to 57 in 2028. This is why it’s a good idea to use a mixture of pensions and Isas. Read about the Isa trick.

Nicola Richardson has tweaked Fire principles to suit her joint income of £42,000 a year with her husband, and she’s on track to retire at the age of 50.

Should I open a pension, Isa or both?

If you plan to retire early, it’s a good idea to have a mix of pensions and Isas. We explain why.

Pensions are the traditional way of saving for retirement and come with more perks than Isas:

• Pension contributions attract tax relief (between 20% and 45%, depending on your income). Isas don’t have this tax perk, but Isa withdrawals are tax-free
• When you take money out of your pension, the first 25% of the pot is tax-free, but the rest will be taxed at your highest income tax rate.
• With workplace schemes, you benefit from employer contributions

You might want to read our simple guide to pensions.

If you’re shopping for a ready-made pension, here are some of the providers we think are the best.

But it’s a good idea to take advantage of Isa perks too:

• Any cash taken out of an Isa is completely tax-free (so you don’t have to worry about income tax)
• You can dip into an Isa at any age, making it a useful product for Fire advocates

Find out which companies score highly in our ratings for their stocks and shares Isas.

Read more: How to retire early: the Isa trick

Can I afford to retire?

Start by considering whether your savings can meet your basic outgoings in retirement. Include utility bills, council tax, food, your mortgage or rent, and any other essential outgoings.

Experts claim that you need about two-thirds of your final salary at retirement after tax to maintain your lifestyle. This is a basic guideline, though, and how much retirees actually need varies widely.

But it’s a good idea to start with the following:

• How much you can expect from the state at retirement, and from what age
• How much you have already saved for your retirement
• How much the state pension and your other savings could provide at retirement

If you end up with an amount that’s less than you hoped for, you may still be able to retire. Bear in mind that your spending may change if your outgoings fall. You’re likely to pay less tax in retirement. There are also ways to produce a retirement income.

Read more: When can I retire? What’s a good retirement income?

Find out if your retirement plans are on track and get specific guidance and simple actions on what you can do now by using our free retirement tool:

Have a back-up plan if things don’t work out

Being too reliant on one source of income in retirement is a bad idea. This is something that many Fire savers realised during 2020 when stock markets plunged in response to the pandemic.

That’s why you should make sure you have alternative sources of income to fund your lifestyle during market turmoil, or when bills start soaring as they have over the past year.

You should have a plan B in case things don’t work out as you expect them to.

If you’re yet to retire, you might also want to be flexible about your retirement age and wait for the markets to recover before you start accessing your pot.

But what if markets start falling once you’ve already retired?

• If you need quick cash, your first port of call should be to use surplus savings rather than cashing in any of your investments. This is what emergency reserves are designed for, to provide income typically worth three to six months of living expenses when money is needed fast
• If you don’t have enough savings and need to sell some of your investments, there’s a risk that you could end up crystallising losses. An emergency reserve may give your investments some time to recover
• At worst, you could use a credit card on a short-term basis. But make sure you’re confident that you can pay it off so you don’t end up in a debt spiral
• Also consider that it might be necessary to return to paid work. It’s important to keep your eye on the long term

But don’t forget, with life expectancy rising, you may live to a ripe old age, so you need to consider whether your investments could fund you for the next 30 or 40 years.