FIRE: Financial Independence, Retire Early
Ever dream of quitting the gruelling nine-to-five and living by your own rules?
Do you want to drop the commute and live by your own schedule and from wherever you fancy?
The FIRE movement might be of interest.
It might seem like a pipe dream, but a growing community of people (known as the FIRE movement) are committed to achieving what has to be the ultimate financial goal: "financial independence".
Achieving financial independence
So, what does achieving financial independence actually look like?
Beyond winning the lottery there are two main routes to financial independence – passive income and extreme saving.
The reality is that financial independence is more likely to be achieved if you combine the two.
It stands to reason that saving a significant portion of your income, and then investing those savings into assets which yield a strong rate of return, you will generate income from which you can start to pay your living expenses.
You will have achieved “financial independence” once you start to generate sufficient passive income to pay your living expenses, without supplementing it with income from employment.
It sounds simple enough, but how do you reach this glorious tipping point?
Proponents of the FIRE movement say that by saving up to 70% of your income, you can retire early and live off small withdrawals from the accumulated funds.
Let’s check the sums.
Millennials, in particular, have embraced the FIRE movement with the aim of retiring well before the traditional retirement age of 65.
However, it seems pretty obvious that in order to save up to 70% of your income, you must first be earning a relatively high income through employment.
In the UK, according to the Office for National Statistics, the median salary for a full-time employee in April 2020 was £31,461. In the US, the median salary for a full-time worker in late 2020 was calculated as $51,168. A slightly higher median income from employment in the US, but not drastically different.
Using the UK as an example. The median full-time employee would be taking home £2,086.12 per month, after tax and assuming no other pre-tax contributions are made.
In order for the median UK employee to save 70%, they would need to tuck away £1,460.28 per month, leaving them £625.84 to pay their living expenses. Anybody who has paid rent and bills in the UK recently would probably scoff at that, writing it off as impossible.