It’s also important to recognise just how much you may need to save – if you retire at 40, you could be looking at a 40 to 50 year retirement to prepare for.
James Norton, head of financial planners at investment management company Vanguard, adds: “Many FIRE investors have traditionally followed the 4% (or 25x income) rule to work out how much they’ll need to accumulate for an early retirement. While it’s a broadly helpful guiding principle, this rule is actually based on calculations done in the 1990s, assuming a 20-30 year retirement. FIRE investors aiming to retire at 40 could be looking at a 50 year+ retirement, meaning the 4% rule is likely to see them running out of cash too soon. In fact, according to our calculations – under the 4% rule, if you retire at 50, you only have a 48% chance of not running out money by age of 90, and less than 36% if you retire at 40. Factor in the rising cost of living and the compounding of investment fees and charges and that figure reduces even further.”
Laura warns: “Regardless of how soon you begin, the FIRE method requires a high level of discipline, dedication and often making significant lifestyle adjustments. It can be hard to forgo the things that your family and friends are doing now so that you can save money.”
What are the drawbacks of the FIRE method?
This saving method isn’t for the faint-hearted. “Lifestyle sacrifices are a major sticking point for many,” says Laura. “Living frugally invariably means shunning luxuries and valuable experiences, such as holidays and celebrations.”
She adds: “As with any form of saving or investing, there are also market risks to consider. Returns are not guaranteed and can be volatile. You must see FIRE as a long-term strategy and be comfortable with the fact that the value of your investments could fluctuate wildly.
“Plans can fail, and unexpected life events or changes in expenses can disrupt your FIRE plans. If you go into a FIRE plan with little flexibility, make sure you think about how you’d cope if something happened that affected your timeline or derailed your plan completely.”
But perhaps the biggest drawback is an emotional one, she says. “Pursuing FIRE can be isolating as it may require you to sacrifice relationships with friends or family if your goals don’t tally with theirs.”
Is FIRE achievable for everyone?
Laura says: “FIRE may not be achievable for everyone, depending on individual circumstances. But the pursuit of financial stability and wealth doesn’t require you to opt completely into FIRE or completely out of it.
“So, focus on creating a personalised financial plan that balances your goals, priorities, and lifestyle. Build a ‘rainy day’ fund of accessible cash; if you have debt, prioritise paying off high-interest balances first; and invest in your future through retirement planning – such as pensions, and diversified investments. The key is to find the right balance between enjoying life today and preparing for a comfortable future.”
How to get started with the FIRE saving method:
Set clear saving and investment goals, with realistic expectations. “Spending as little as possible whilst saving aggressively requires an extremely disciplined approach and may entail making some difficult lifestyle sacrifices,” says James. “Sitting down and setting realistic saving and investment goals is the first crucial step for people wanting to achieve the early retirement dream. Since we’re now living longer on average, your retirement goals should account for the realities of an intended 50 years (or more) in drawdown, as well as inflation assumptions throughout this time.”
Ask yourself: is it worth it? “Consider the potential risks and uncertainties involved and what your appetite is for them,” says Laura. “FIRE can work, but as with a lot of things, it isn’t for everyone, so just take time to think about whether it will enrich the life you want or detract from it.”
And finally, put some thought into your personal goals. “Before trying FIRE, consider your financial goals and priorities,” says Laura. “Do you want to retire early to pursue hobbies or a different lifestyle? Is early retirement the only way you can do that? Also, think about your willingness to make lifestyle adjustments, knowing that these can be long-term, and make sure you’re comfortable with the time and effort required for financial planning and investing.”