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All about FIRE (Financial Independence, Retire Early)?

What is the FIRE movement?

Many people ask, how do I retire early? FIRE may be the answer. FIRE stands for Financial Independence, Retire Early (FIRE) and its followers are focussed on two things: cutting costs and earning more. However, they don’t want to wait until the traditional retirement age to do it. 

There is a growing trend in the UK of savers who are committed to financial independence and retiring much earlier than the state pension age of 65. Instead, those who subscribe to FIRE,  are aiming to retire and follow their dream, passions and interests when they are still in their 30s or early 40s.

By dedicating up to 70% of income to savings, followers of the FIRE movement may eventually be able to quit their jobs and live solely off small withdrawals from their portfolios, decades before the conventional UK retirement age.

FIRE (Financial Independence, Retire Early)FIRE (Financial Independence, Retire Early)FIRE (Financial Independence, Retire Early)

How to calculate your FIRE target

There are no quick or sexy ways to achieve this, and if you’re the average UK consumer who needs over £540,000 to hit your FIRE target, you need to work hard to achieve it. FIRE’s principles are based on setting a goal with the 4% rule. This rule is known as the ‘safe withdrawal rate’ or the number of yearly expenses you should be able to withdraw from your savings when you retire, without denting the principal amount.

This is worked out by finding out how much you spend annually (including all expenses) and then multiplying it by 25. This should give you enough expenses to withdraw 4% throughout your retirement. Many following the FIRE principle manage to save-away 50-60% of their post-tax income, and this is done by making frugal lifestyle choices, ways to make additional income and cutting down on overall expenditure. These examples include:

  • Moving closer to work: This may help save on travel costs, especially if you are then able to walk to work or take the bus rather than the train, which often works out cheaper in many UK cities.
  • Renting your spare room out: This could generate important additional income to help boost your FIRE target
  • Moving in with parents or a house share
  • Foregoing holidays for staycations
  • Reducing food waste: Over 65% of UK adults admit to buying too much food that ends up being thrown away, which means that the average family of four can save just over £60 per month by reducing their food waste.

FIRE requires big changes. It’s also important to remember that typically people try to aim for the same lifestyle that they  want to maintain when retired, so if choices are too frugal, you may want to adjust and align your savings ratio.

Be smart in how you save!

Another smart way to achieve your FIRE goals is to earn more money. Easier said than done, especially if you can’t take on additional or alternate employment, or boost your income in other ways. However, by placing your hard-earned FIRE savings into an equally hard-working high-interest account, it may help to bridge the gap slightly. One of the easiest ways to do this is to step ladder your savings, building pots using high-interest  easy access accounts to save money monthly, then once you have enough accrued, move these into a larger paying, long term, fixed-rate term deposit and lock away your money until maturity. There are many competitive rates being offered by banks that are fully FSCS protected, which may help savers secure their financial futures much quicker. In fact, at Raisin UK, we’ve already started to see an uplift in the average savings held by 40-50-year-olds in the last year, an interesting indication that some UK savers are starting to see the benefits of locking away their cash with our partner banks.

 

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