Early retirement: are you a FIRE starter?

Remember when you were a teenager? It’s probably the richest you’ve ever been in your life.

You were still living rent-free with your parents, with few or no expenses to speak of. Virtually everything you earned from your pocket money or part-time job was yours to do with as you wished.

How many of us would love to return to the sort of financial freedom we had in those days?

Financial freedom is the driving force behind the FIRE (Financial Independence Retire Early) movement.

FIRE aficionados prioritise saving and investing as much as possible, along with spending less, in their most profitable working years. This means they can stop working much sooner than most people and live off the income generated by their investments and previous frugal lifestyle.

Many of them blog about it, too, notably ‘Simple Living in Somerset’ and Mr Money Mustache, who has been ‘retired’ for 15 years and is still only 46 years old.

How do they do it?

Good question! You could while away a week reading FIRE bloggers like Maynard Paton and still come away with the conclusion that they seem to be working harder than ever managing, and writing about, their investments, especially in the face of Covid-related stock market falls.

Don’t know about you, but spending more than a few hours a month tending to your investments doesn’t sound like a peaceful ‘retirement’ to us.

And as evidence-based advisors, we wouldn’t advocate continual churning of your portfolio to try and maximise returns, even – especially – in turbulent times like these.

Many FIRE advocates are prolific active investors, whose focus is spotting stocks that are ‘hot’ and trading them to maximise returns. It’s a risky strategy and one no evidence-based investor would choose to follow.

But retiring early? Super-early? That doesn’t sound like such a bad idea.

So how do you do it without risking everything and staying true to your evidence-based principles?

Planning is the key

Like most successful lifestyles, the key is to start early and plan thoroughly.

But don’t forget: the frugal lifestyle you allocate yourself in your early 20s, saving half of what you earn and living on baked beans, may be trickier to maintain as you progress through different life stages.

Starting a family, especially, can be like turning on a money tap that takes 20 years to turn off.

Sitting down with an evidence-based financial planner as soon as possible will give you a head start on making your FIRE dreams come true.

Enthusiasm and excitement can only take you so far. Setting goals and then creating a financial roadmap will give you more of a chance of achieving them.

Let’s say you’re 25 and you want to achieve financial freedom when you’re 45. That’s more than 20 years (at least) before most people retire.

You can look forward to the state pension (as long as you’ve contributed at least 10 years’ worth of national insurance payments), and any occupational or private pension. But you won’t be able to access these, as things stand, until you’re at least 66 (for the state pension) and 55 (for private provision) respectively.

Don’t forget you’ll need 35 qualifying years of NI payments to get the new full State Pension if you do not have a National Insurance record before 6 April 2016.

How will you fund those 20 pre-pension years (and beyond, if you want to live comfortably)?

You can assume you’ll continue to earn a reasonable amount before you’re 45. But don’t presume your expenses will stay the same, even if you forego things like a car, foreign holidays or private education for your kids.

An evidence-based financial planner will be able to build a roadmap to age 45 which takes into account most of the predictable turns and diversions life will throw at you.

What does ‘retirement’ mean?

The traditional view of ‘retirement’ is ‘stopping work and enjoying life’.

Of course, this implies that you don’t enjoy work, which isn’t always the case. But implicit within the term ‘retirement’ is doing very little, apart from hedonistic pursuits such as long holidays and plenty of gardening.

If you retire in your 40s it’s unlikely that you’ll be ready to settle down with a trowel and a seed catalogue.

Many FIRE advocates have made this mistake, though, notably blogger Finimus:

“I’m fairly sure that when I was saving hard in my 20’s I had the vague idea that my future multi-millionaire self would be spending his days lounging around on his private sun-bleached Caribbean island draped in nubile dusky maidens, or perhaps heli-skiing with super-models in the Alps. What wasn’t in mind: doing the grocery shop, popping some washing on, un-packing the dish-washer, and then picking my daughter up from hockey club. Sure – these are all things that need doing, but they aren’t very exciting, are they? This is more house-husband than super-rich.”

Blogpost ‘Early retirement: Boring’, 14 November 2020.

Stop work in your 40s, and even with the finances well taken care of, you’ll still probably have relatively young children to support, along with, perhaps, elderly parents to care for.

More to the point, life is boring without a sense of purpose. For most of us, that sense of purpose is covered by ‘work’, which exists primarily to help us fund ‘life’.

Those who have made sense of FIRE, like Mr Money Mustache, still do some form of work to keep things ticking over; but a lot less, and a lot more enjoyably, than they would have done in their pre-FIRE days.

Even if you are lucky enough to be able to live completely and fully on your investments, there are only so many cruises you can go on.

Stopping work at 45 means you probably have another 45 years to fill.

Plan how you’re going to spend those years, as well as how you’re going to fund them, and you could make FIRE work for you.

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