Illustration by Ryan Holt
“You are fired!” might be words you don't want to hear, however, nowadays “getting fired”or better put, “having FIREd” are more hopeful words for your financial future. FIRE stands for Financial Independence, Retire Early, a lifestyle movement that rose to popularity amongst millennials in the 2010s. The main ideas behind the FIRE movement originate from the 1992 best-selling book “Your Money or Your Life” written by Vicki Robin and Joe Dominguez. However, it was brought back and popularised by the 2010 book Early Retirement Extreme by Jacob Lund Fisker.
The idea is that by following an aggressive saving and investing strategy, somewhere between 50–75% of your income, you can retire at a very young age, sometimes under 30 by having investments that generate enough passive income to cover your expenses. The FIRE movement is based on a few assumptions — a well-diversified investment should return 8% per year and that the inflation is 2-3% per year. For the last 100 years, these assumptions have been correct on average. The returns will be split up between the rise in dividends’ and the investments’ value. For example, if you invest 1 million into a broad market index fund, over time, the returns should average out to be 8% per year. This means that you would be able to draw £80,000 per year from your returns to spend on your expenses. How you get to invest £1,000,000 in the first place is a lot of what the FIRE movement is about.
However, FIRE is not a get rich quick scheme, nor is it foolproof. At a 2% rate of inflation, in 50 years, the returns of £80,000 per year would only be an equivalent of £32,000 today. You might have to go back to work at 70 after 40 years of "retirement". We both know how difficult it would be to be reintegrated into the workforce.
However, it is not a dead-end road. In order for your £1,000,000 portfolio to retain its value, you would need to put in £20,000 extra per year, to overcome the effect of the 2% inflation rate. If you want a buffer in your investment growth, you would need to reinvest 3% of the £1,000,000 every year. Your returns will be decreased to £50,000 rather than the original £80,000 per year. It is less, but at least it’s not as bad as £32,000.
In the investing world, there is a strategy called dollar-cost averaging. This strategy is based on the premise that although the market is unpredictable, it tends to go up over time. Dollar-cost averaging is when you invest the same amount of money at regular intervals (i.e. every month).
This strategy helps prevent counter-productive decisions out of greed or fear, such as buying more when prices rise or panic-selling when prices decline.
If you hold off from investing for a year to do your research before investing all of it into one particular stock, you would have missed a lot of time in the market to generate returns. Take the 8% return rate; if you hold off investing £10,000 for a year, you would have already missed the chance to generate £800.
Since you only have a set amount of money for investment each month, you will automatically buy more stocks when the prices are low and less when the prices are high.
However, If someone is living off of £5,000 per month, when the prices of the shares are high, they can sell less but when the prices are low, they will have to sell more shares in order to maintain the £5,000 living expenses which defeats the whole purpose of dollar-cost averaging - buying low.
The 3% Rule. 3% is considered the safe withdrawal rate for indefinite financial independence. The 3% comes from the assumed 8% expected return, from that deduct 2% inflation, 1% market volatility, 1% negative impact from dollar-cost averaging and 1% for margin of safety, and that gives you 3%. So theoretically, if you can live off of 3% of your portfolio’s value before taxes, you have achieved indefinite financial independence.
Another question is how early is “retire early”? 3% is not a lot, so if you want to live off of £100,000 per year, you would need a £3.3 million investment. You would still need a lot of money to achieve FIRE. Believe it or not, there are actually different tiers of FIRE — FatFIRE, FIRE, LeanFIRE. It depends on what you want to do with the returns, whether you want to be a big spender or very frugal. LeanFIRE is when you are living on a shoestring budget. FatFIRE is when you are living lavishly. So how much you need to make from your passive income depends on the lifestyle you lead. There are benefits and drawbacks to both LeanFIRE and FatFIRE. Some argue FatFIRE can afford greater flexibility, freedom, and even protection from unexpected events in early retirement.
If you are more concerned about financial independence than retiring early, then you may want to consider CoastFIRE. CoastFIRE means you no longer have to save money to retire. The difference between CoastFIRE and regular FIRE is that with regular FIRE, you no longer need income to retire. With CoastFIRE, you still need income to cover expenses; you just don't need to worry about saving money for retirement. To achieve CoastFIRE, you need to choose what amount you need for retirement and exactly when. For example, if you have a £100,000 investment at 30, take the annual return rate of 8%, you can assume to be retiring at 65 with £1,500,000.
On the other hand, there is also BaristaFIRE, which is when you reach your financial independence number and work a part-time job at a workplace that provides health insurance benefits, like Starbucks, hence “Barista”. People in the BaristFIRE movement have usually achieved financial independence and are working a part-time job solely for the health insurance benefits and a social outlet.
All in all, FIRE is a great way to retire early; however, it still requires a lot of money, to begin with, so it may not work for everybody, but there are takeaways even if it's not feasible for you. You can still apply the mindset of equating time to money when determining how to spend your money. For example, when purchasing a new iPhone, which would cost you around £1,000, and you’re working £10/hour, are you willing to work 100 hours for that phone? This is a great takeaway from the FIRE movement to help you make smarter money decisions.
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