Intentional about FIRE
Let me unpack the FIRE backpack and try to give you a tour of the journey towards FIRE.
What is FIRE?
FIRE stands for Financial Independence Retire Early. The aim of this movement is to save and invest as much as possible and as early as possible such that you can retire far earlier than the average person. It was born out of a 1992 best-selling book called “Your Money or Your Life” by Vicki Robin and Joe Dominguez.
How do you do it?
To achieve FIRE you need first fully understand the yearly expenses you will require in the scenario where you live completely off your investments. To make an estimate of the investment pot you would need, you can use the 4% rule. For example, you divide your annual expenses by 4% to calculate the investment pot needed (e.g. £30,000 / 4% = £750,000).
What is the 4% rule?
The 4% rule is a practical rule of thumb that prospective FIRE pursuers use to estimate their retirement withdrawal amount and the required investment pot needed to sustain their retirement.
The Trinity Study is the source of the 4% rule which relates to a 1998 paper written by three professors of finance. They looked at payout periods from 15 to 30 years, and withdrawals that increased with inflation. They found that withdrawal rates of 3% to 4% produce high portfolio success rates for stock-dominated portfolios.
Note: if you use the 4% rule, remember that every £1,000 you want to add to your yearly expenses (once you achieve FIRE) will result in a £25,000 increase in your required investment pot. Food for thought!
Why do it?
Everyone has their own reasons for FIRE. Some might not even want the RE part (i.e. retire early). For me, it is about choice.
I pursue FIRE because one day I would like to be able to be financially independent of working a 9-5 job. Another goal of mine (and the Mrs) is to be able to sell everything we own and travel the world.
Realistically, the only way to do this is to live intentionally and pursue this goal with everything we have got. Even if we do not succeed within the rough timescales we expect to, we will still be in a much better place financially that we could ever have imagined.
Are there different ways to approach FIRE?
Yes, you can approach FIRE in a number of ways. Here are a few examples:
LeanFIRE: You are able to retire using a smaller investment pot (with limited living expenses) but you will need to live a frugal/ minimalist lifestyle in retirement.
FatFIRE: This is the opposite to LeanFIRE. You are able to retire using a larger investment pot.
BaristaFIRE: This is where you are able to live a semi-retired lifestyle and work part-time to supplement your investment income.
CoastFIRE: Similar to BaristaFIRE but in this scenario you have enough invested at an early age that you no longer need to invest because the power of compound interest will eventually grow your investment pot to cover your lifestyle at a future date.
Is the FIRE movement right for you?
If you are the type of person who likes a challenge and can wait for delayed gratification, then the FIRE movement is the right place for you. FIRE is all about forward-thinking and putting your future self before your present self. But it doesn’t need to be complete frugality. You just need to keep track of your savings and investments to ensure you are working towards milestones on your journey to FIRE.
A method I use that keeps me motivated (coined by the 2GoRoam Youtube Channel) is to track how many FIRE months I have achieved. Essentially you break down your FIRE number into months of the year which represent the ability to retire for each month of the year for the rest of your life. Once you have achieved all 12 months, you have achieved FIRE. For example, if your FIRE number (required investment pot) is £750,000 then you would divide this by 12 (£750,000 / 12 = £62,500). Every time you accumulate an additional £62,500, you have achieved 1 month of FIRE.
At the time of writing this (July 2022), the Mrs and I have achieved 4.7 months of FIRE.
