What is FIRE? (Part 1)

FIRE

Financial Independence Retire Early

This is first in a FIRE Series where we explore FIRE and its categories (CoastFIRE, BaristaFIRE, LeanFIRE, FIRE, FatFIRE).

Some people are very focused on reaching the Retire Early (RE) milestone, others wish to become Financially Independent (FI) so work becomes optional, but may not rush to retire, instead becoming more discerning with their career.

FIRE raises both lifestyle philosophy and personal finance mathematics.

FIRE maths

In some ways FIRE maths is no different to regular retirement maths, FIRE simply emphasis the when and takes control.

Many FIRE commentators fixate initially on target pot value, where you have enough invested that your pot can sustain your lifestyle. While important for calculations, beginning here leads to anchoring on arbitrary and for some unattainable figures such as £1m, £1.5m, £2m.

Calculation

Instead the key to FIRE and where we begin is your anticipated expenses, say you require £30,000 per year to cover expenses during retirement.

We next need a Safe Withdrawal Rate (SWR) allowing drawdown of your expenses without ever running out of money, over a long early retirement period.

Note expected investment returns are useful inputs but unfortunately the 10% S&P500 average return cannot be directly applied, sorry!

There is much high-quality research on SWRs which we will cover during a future post, but for today let’s assume a 4% SWR.

If you wish to spend £30,000 per year alongside a 4% SWR you require £30,000 * 25 = £750,000

More intuitively calculated as £750,000 * 4% = £30,000

Therefore we reach your target pot value of £750,000

This is a very simple example using rules of thumb. Accurate planning requires cash flow modelling and stress-testing, see our Retire Earlier coaching package.

The question is how quickly do you want to reach it. Are you aiming for state pension age (67), private pension age (55-57), or sooner? 50? 48? 45? 40?

How much do you need to invest now to hit those timelines? How are you tracking right now?

Aside from the maths how do you feel about leaving work routines?

And here we introduce the next post on FIRE Mindset and Lifestyle…