Most of us can’t afford to stop working until we reach our 60s, but if you’re a subscriber to the ‘Financial Independence, Retire Early’ (FIRE) movement, you’ll be a dedicated saver who is determined to retire as soon as possible.
A growing number of people are sharing their frugal lifestyles and money-saving techniques as part of the FIRE community. The idea is that by making sacrifices now and saving a large proportion of your salary each month, you can reach financial independence, with enough set aside that you don’t have to work, and can instead use your time as you wish. Some FIRE subscribers are aiming to retire as early as their 40s, while others are using the movement’s principles to retire in their 50s, or much earlier than they would otherwise have been able to.
However, while the idea of early retirement may appeal to some, in reality most of us need to continue saving for many years beyond our 50s to provide for the rest of our lives, and we may want to continue working, even if part-time. After all, a comfortable retirement is usually the goal, and it can be difficult to know how much you need to save towards this, as no-one knows how long they are going to live. Read our article How much should I save for retirement? to find out more.
Even so, some of the principles behind the FIRE philosophy may form a useful foundation for retirement planning, and it shows that by taking a disciplined approach to saving now we have a greater chance of building a substantial retirement pot.
If you’re considering getting professional financial advice, Unbiased is offering Rest Less members a free pension review. It’s a chance to have a qualified independent financial advisor (IFA) take a look at your pension arrangements and give an unbiased assessment of your retirement savings.
The review is free and without obligation, but if the IFA feels you’d benefit from paid financial advice, they’ll go over how that works and the charges involved.
What is the FIRE movement?
The ‘Financial Independence, Retire Early’ (FIRE) philosophy first gained popularity in the United States in the early 1990s, when its founders lived extremely frugally, stating they were doing this to gain freedom from employment, and live as they wanted.
In the UK, the movement has gathered a growing number of followers over the decades, primarily among millennials and younger generations. The pandemic sparked further interest in it, prompting many people to reassess what they want from life, and what’s truly important to them away from the workplace. After all, while taking early retirement would likely mean a more frugal lifestyle, some people see this as a sacrifice worth making.
Thousands of FIRE followers are now sharing their frugal living tips and extreme saving methods online, which include saving between 25% and 50% of their salary, and generating a passive income stream from investments and other assets in retirement.
As a general rule of thumb, if you’re part of the FIRE community you’ll aim to save 25 times your annual outgoings to reach ‘financial independence’. The philosophy is that you’re then able to live off the income from your investments or rental properties, for example, and retire early without relying on pensions (as these can only be accessed from age 55). The FIRE plan then suggests you take a maximum of 4% income from your investments each year to ensure your money doesn’t run out, although of course there are no guarantees that this won’t happen, especially if stock markets experience a prolonged period of price declines.
The FIRE principles also include having an emergency savings fund set aside that amounts to three to six months’ worth of salary, and focusing on cheap tracker funds for your investments so you aren’t paying a lot in management fees. By the time you give up work, you’ll also own your home outright, so that you have as much disposable income to live off as possible.
However, while this is great for those who are able to squirrel money away each month, these days it can be an uphill struggle to save anything at all for many households. Salaries aren’t keeping pace with the rising cost of living, and essentials such as food and energy are soaring in cost. Read more in our article What does inflation mean for my money?
It’s important, too, to bear in mind that the FIRE movement’s rise coincided with a time when the stock market was undergoing a bull run, boosting investment returns, and people had more disposable income.
Not everyone wants to retire early either. Alistair McQueen, head of savings & retirement at Aviva, said: “Over recent times, the trend has not been towards “Retire Early” but “Retire Later”. There are more than one million people over the age of 65 still in active employment – a record high.”
“To seek ‘financial independence’ is a goal to which we should all strive. But for many, the second goal is not ‘retire early’, but one of finding employment that continues to provide fulfillment and reward for longer.”
What is the typical retirement age?
You can retire whenever you want, but most of us need to factor in when we can access our pension, as we wouldn’t be able to save and invest enough outside of our pension to provide for retirement.
The age you can access your pension will depend on the type of scheme you have. If you’ve a defined contribution pension, you can access it from the age of 55, withdrawing up to 25% of your pension without paying any tax, and using the money however you wish. Find out more in our article What is a defined contribution pension? However, if you’ve an old style final salary pension, your scheme administrator will set your pension age, which may be 60 or 65, for example. Find out more in our article What is a defined benefit pension? You can find out more about when you might be able to access your retirement savings in our guide Retirement age: When can I retire?
However, of course, retirement is not always a choice. Since the pandemic began, there have been thousands of people forced into early retirement, due to redundancy, fewer employment opportunities and, unfortunately, age discrimination, and desperately worried about how they’ll make ends meet. You can find some useful steps that may help you manage in these circumstances in our article How can I manage the financial impact of early retirement?
Remember that the current State Pension age is 66 (rising to 67 by 2028), which means that you’re likely to have to wait a number of years before receiving this if you access your workplace and/or personal pension early. The current new State Pension is £203.85 in the 2023/24 tax year, but you’ll need 35 qualifying years of National Insurance Contributions to receive this. Read more in our article How the State Pension works.
How much do you need to retire in your 50s?
You don’t necessarily need to be extremely rich to retire in your 50s, but chances are you’ll have saved particularly hard, and benefitted from some luck and timing with your investments to build a big enough pot to stop working. Retiring in your 50s is still considered early retirement these days, considering that the State Pension age is currently 66, and many people don’t retire until after this.
Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown, said: “Retiring at 55, for example, takes a lot of planning and discipline. You may currently be able to take your workplace/personal pension from the age of 55 (this is due to increase) but your state pension won’t kick in until at least age 66 so there’s at least a decade where you can’t rely on this important part of your retirement income and so will need to contribute a lot more to your pension to cover this shortfall.”
Bear in mind that the early retirement age is rising to 58 in 2028, so it’s worth checking that this increase doesn’t interfere with your plans if you’re aiming to retire at age 55.
The Pensions and Lifetime Savings Association (PLSA) recently said a single person would need an income of £31,300 a year to enjoy a moderate retirement and this includes the full State Pension, which is worth just over £10,600 per year.
Morrissey says: “You would need to ramp up your [pension] contributions well in excess of current auto-enrolment minimums and commit to increasing them regularly when you get a pay increase or move jobs for instance.
“You should also check whether your employer is willing to do an employer match – this is where they increase their contribution to your pension as long as you do – over time this can make a considerable difference to how much is contributed to your pension.
“People are now auto-enrolled into a pension at age 22 and if they want to retire at age 55 they need to have saved enough to see them through a retirement that could last in excess of thirty years – this is going to take a lot of financial trade-offs and you may need to make some tough decisions along the way.”
Certainly, the figures you need to save under the FIRE principles seem impossible to most of us. Rather than focusing on the ultimate sum you might need, think about how much is achievable for you given your personal circumstances. A phased retirement could offer a useful compromise if you’d like to retire early, but can’t yet afford to do so, and would like to use your pension/savings to top up your income rather than replace all your earnings. You can find out more about how this could work in our article How can I phase my retirement?
How can you increase your chances of early retirement?
You don’t need to sign up to the FIRE movement to make use of some of its general principles, which can be tweaked to suit your personal circumstances.
Saveas much of your income as you can afford: Putting away 25% or 50% of your salary every month is pie in the sky for most of us, but there might be ways to save a little more even when living costs are rising substantially. Of course, you’ll need to cover your essential monthly bills, but you may be able to reduce these by shopping around. You can compare deals and reduce bills using some of these Money Saving Comparison Tools. Find more ways to beat rising living costs in our article How to save money – 17 money-saving tips.
Live frugally: Most of us will be looking for ways to tighten our belts when the day-to-day costs such as food and energy are soaring, and there are plenty of ways we can adopt a more frugal way of living. This might not amount to growing all your own vegetables, or only ever buying secondhand, but some changes could be easy to make, such as writing a meal plan, or repairing items before buying new ones. You can find lots of tips from the Rest Less community in our article 17 frugal living tips.
Helen Morrissey said: “The whole FIRE movement is around living frugally and over time developing a strong financial discipline that should help you weather most financial storms. However, this is dependent on you having built a buffer against price rises, if you have only saved enough to just cover your standard of living before you retire then you will struggle.”
Maximise employee benefits:
You’ll ideally have started saving into a pension when you started working life, and pay a set percentage of your salary into this until you leave the scheme or retire. Under auto-enrolment rules, the minimum total contribution is 8% of qualifying earnings, and your employer’s contribution can’t be less than 3%.
Some employers will pay in more, but if they pay 4%, for example, you don’t have to pay more than 4% into your pension. If you wish, you can usually pay in extra if you are able and want to, though. You can also make additional one off voluntary contributions and receive tax relief on these. Find out more about workplace pensions in our article How does pension auto-enrolment work?
Boost your income: To save as much as you can, you may want to try boosting your income. If you’re unable to get a salary rise from your employer, you could find a flexible job or activity to do in your spare time to earn some extra cash. You can find some ideas in our article Popular side hustle ideas that can help you earn extra cash.
Save tax-efficiently: The crux of the FIRE movement is about building a nest egg for a secure financial future, and choosing the right home for your money is a vital part of the process. If you’re investing, using individual savings accounts (ISAs) is a good place to put your money because of their tax benefits. You can put your money into stocks and shares within an ISA, without paying capital gains tax or income tax on your returns. Alongside pensions, ISAs can form an important part of your retirement planning. Learn more in our articles Everything you need to know about ISAs.
Consider low-cost tracker funds: If you’re comfortable accepting the risks involved in investing, tracker funds are cheap funds that follow the performance of a particular stock market, such as the FTSE100 index of Britain’s largest companies. They’re usually run by a computer, rather than a manager, which brings down the overall charges. Some buy shares in the particular index, while others will hold a wide range of companies. Find out more in our guide Investing – the basics.
Overpay your mortgage: You’re usually able to overpay up to 10% of your mortgage balance without paying a penalty each year, but check your mortgage terms as this can vary. For example, if you’ve £100,000 left on your mortgage, you should be able to repay up to £10,000 a year extra without charge. This could shave years off your term and significantly reduces the amount of interest you pay back overall. Find out more in our article Should I overpay my mortgage?
Can you afford to retire?
If you’ve been diligently saving for decades, you’ll want to know if you’ve enough to retire, or at least how much this might provide as a retirement income. Your starting point is to consider whether your savings and pensions will be enough to cover all your outgoings in retirement. This includes all your regular bills, such as food, clothing, your mortgage or rent, Council Tax and utility bills, alongside other debts such as credit cards or personal loan.
As a general rule of thumb, experts say that you need around two-thirds of your final salary at retirement after tax to maintain your lifestyle, but this of course depends on your personal circumstances and retirement aspirations. Read more in our articles Can you afford to retire? and How much should I save for retirement?
Alistair McQueen, Head of Savings & Retirement at Aviva, said: “My top three tips towards taking financial responsibility for our retirement plans are to understand how much you can expect from the state at retirement, and from what age; to understand how much you have already saved for your retirement, beyond the state provision; and to understand how much these two sources – the state and other savings – could provide at retirement. This information gives you control, and empowers you to consider what actions you could take to improve your prospects.”
If this amount is less than you think or had hoped for, you might still be able to afford to retire, as your spending could change in retirement if your outgoings reduce, and you will most likely pay less tax in retirement. You won’t be paying National Insurance, for example, nor commuting costs, and your tax bills can be carefully managed by making the most of your tax allowances. You also have more choice than ever when it comes to how you use your pension to generate a retirement income. Find out more in our guide Your pension options at retirement.
Where to go for help
However much you’ve saved for retirement, it’s important to ensure that your money is working as hard as possible for you. If you want personal recommendations about where to invest, and how to take an income from your investments, you’ll need to seek professional financial advice. You can find a local financial advisor on VouchedFor* or Unbiased*, or for more information, check out our guides on How to find the right financial advisor for you or How to get advice on your pension.
Once you reach age 50, you can receive free guidance on your pension choices at retirement from the Government’s Pension Wise service, run by the Pensions Advisory Service and Citizens Advice.
However, if you want personal recommendations about where to invest your retirement savings, you’ll need to seek professional financial advice.
If you’re considering getting professional financial advice, Unbiased is offering Rest Less members a free pension review. It’s a chance to have a qualified independent financial advisor (IFA) take a look at your pension arrangements and give an unbiased assessment of your retirement savings.
The review is free and without obligation, but if the IFA feels you’d benefit from paid financial advice, they’ll go over how that works and the charges involved.
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