FIRE, or Financial Independence, Retire Early, is a personal finance strategy that is designed to enable you to retire years or even decades ahead of the “standard” retirement age. The thinking behind FIRE is broadly that retirement is wasted on older people, and most of us want to be able to wander the world—or simply engage in our chosen hobbies more readily—before we are too old to enjoy the experience.

The idea of FIRE is that you live a modest lifestyle while you are young, spending as little as possible. This allows you to save most of your income—and some suggest as much as half to three-quarters is ideal—and invest it to provide you with an income for life without needing to work. It means that you have to take a hit in the meantime, but the rewards, it is suggested, are worth the pain. This page explains more.

How Did FIRE Start?

It is not actually clear when the acronym FIRE was first used, or by whom.

However, it seems to be generally agreed that the 1992 book “Your Money or Your Life” discussed many of the ideas that have since been embraced by the advocates of FIRE. These include thinking about your expenses in terms of how many hours you had to work to pay for each of them.

Another important concept is the idea that you don’t focus on retirement age, but rather on gaining financial independence as a way to allow you to retire, or reduce your working hours, whenever you want.

How Does FIRE Work?

The FIRE strategy is built around the concept of your ‘FIRE number’.

This is calculated by multiplying your expected annual expenses by 25. Once you have savings that total this amount—that is, enough to live on for 25 years—then you can retire. The aim is to be able to do this in your 40s or 50s. Once retired, you can draw down small amounts from your portfolio to fund your retirement.

The second issue that matters in FIRE is therefore how much you can withdraw each year.

Advice is generally that you can withdraw up to 4% of the value in the first year, and then adjust after that to take account of inflation. This should mean that your investments last you for the rest of your life. However, this figure was calculated based on a 20-year retirement and historic rates of stock market growth. If you plan to retire at 40—or if the stock market starts to behave differently—it may not be accurate, and you might need to rethink your approach.

What Savings and Investments Do You Need for FIRE?

Part of the point of FIRE is that you need to invest effectively. This is the best way to enable your money to grow at the speed that you need to be able to retire early.

You cannot rely on savings alone, particularly when interest rates are fairly low.

You will also need to maximise your tax-free savings and investments, by using vehicles such as Individual Savings Accounts in the UK, and 401(k) plans in the US.

It follows that you still need a contingency fund for any emergencies. You do not want to find that all your savings are tied up in long-term investments and you will have to take out a loan to pay for a new boiler.

Our page on Financial Contingency Planning provides more advice about this.

What Variations of FIRE Exist?

There are several common variations of FIRE. These include:

• Lean FIRE, where you focus heavily on cutting costs even in retirement. This allows you to retire with a lower level of savings, but you will not be able to spend on luxury items, and your fund for contingencies is likely to be lower.

• Fat FIRE, where you aim to achieve a more luxurious lifestyle in retirement. This means that you need to build up a bigger savings pot, which may need some highly risky investing and/or a very high income.

• Barista FIRE, where you retire from traditional full-time work but may work part-time in a relatively low-stress job, such as being a barista. The idea is that this will cover your day-to-day expenses and you will not have to draw down on your investments as much or as quickly, requiring a lower level of savings than traditional FIRE.

• Coast FIRE, where you save aggressively early in your working life, so that you can invest and allow your investments to grow, then coast towards retirement at a more traditional age. This allows you to work fewer hours, or in a lower-stress job, once you have achieved your desired level of savings.

What Practical Steps Should You Take to Embrace FIRE?

There are three key practical steps to achieve FIRE.

• Decide which form of FIRE you want to embrace

  This dictates the amount of savings that you need.

• Consider how much money you need, using your FIRE number.

  You may need to adjust your target up or down, depending on your chosen form of FIRE.

• Develop your strategy

  Whichever form of FIRE you want to use, you will then need a strategy to cut your costs and/or make more money, to allow you to save. The general advice is to live below your means, but you may also find a ‘side hustle’ is useful for a bit of extra income. For example, if you are an ‘empty nester’, you might consider renting out a room in your house to make extra money.

You may find it helpful to visit our pages on Spending Less, Avoiding Spending and Making More Money for some ideas to help. We also have pages on saving money on household bills, food and groceries and cars.

You may find it helpful to track your expenses for a few months, to see what you might be able to reduce. Most of us have very little idea how much we spend on everyday items, so this can be a very informative exercise. A clear budget will also help you to stay within your target spending.

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A Final Thought

FIRE may sound very attractive, but it also has some drawbacks.

You are at risk of running out of money if you encounter unexpected costs during your (long) retirement period. You are also at the mercy of financial markets—and at an age when it may be difficult to go back to paid employment. Finally, you will need to plan for retirement to ensure that you create a fulfilling lifestyle and are able to continue to feel relevant.

However, if you feel comfortable with those risks, it could be a very good strategy—and if nothing else, reducing your expenditure and saving more is very unlikely to cause you a serious problem.

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