image/svg+xml

Resources

Can you retire in your 30s or 40s? The FIRE movement says you can

People sitting around a bright bonfire at night

Many people dream of retiring as early as they can. There is an allure to breaking free from the shackles of the rat race and living the life you want as early as possible. And why not? You only get one shot at life, so you’ll want some free time to do everything you want.

But despite this dream, many people believe that achieving an early retirement is unrealistic. It’s often seen as only for those with super high-paying jobs and a large amount of savings.

But a recent movement known as FIRE (financial independence, retire early) is turning heads and making people realise that early retirement may not be as unrealistic as they think.

Read on to find out more about the FIRE movement and how you may be able to achieve early retirement.

The FIRE movement is all about saving hard to retire early

The goal of the FIRE philosophy is to be so strict on saving and investing that you will have the financial freedom to retire in your 30s or 40s.

“Retiring” in this sense is simply to have the financial freedom to do what you want, when you want, but doesn’t mean you have to stop working entirely.

It isn’t without sacrifice, as is the nature of extreme saving. The FIRE approach means that luxury purchases, one-off treats, and most unnecessary expenditures should be cut out. The aim is that you put away and invest the maximum you possibly can each month, from as early in your career as possible.

This way, you may be able to accumulate the assets required to generate a passive income throughout the remainder of your retirement years. The suggested amount to achieve this is 25-times your annual expenditure, with an annual withdrawal allowance of around 4%.

Your investments will hopefully continue to grow while you draw from them each year, giving you enough savings to be financially secure. And, only drawing 4% prevents you from drastically reducing the value of your investments, and thus your financial security in the future.

But is the FIRE philosophy actually a feasible way of retiring early? Depending on when you start, it’s entirely possible. Starting in your early 20s could see you retire before you turn 40, but that is dependent on your income, and how effectively you save.

So, how can you improve the way you save your money? Here are some tips to help you with extreme budgeting.

3 tips for extreme budgeting

  1. Don’t keep your savings in cash

First things first: what you do with your savings is important. It doesn’t matter how much you save if you don’t do so effectively. By keeping it all in a cash savings account (or worse, somewhere “safe” inside your home) you will likely reduce its real value over time thanks to inflation.

Inflation is a measure of the rate at which prices are rising. According to the Office for National Statistics, the inflation rate in the UK in June 2021 was 2.1%. By keeping your savings in cash, you could be reducing its spending power over time, as any interest it earns is likely not to keep up with inflation.

By investing your savings on the stock market, you are increasing the potential for your money to grow, as it may be able to generate returns higher than that of inflation. But bear in mind that the value of your investments can go down as well as up, and past performance is not indicative of the future.

Speaking to a financial adviser or opening a Stocks and Shares ISA are two of the simplest ways to start investing in the stock market.

  1. Cut out every unnecessary cost

When employing extreme saving techniques, anything that isn’t crucial needs to go. You aren’t going to be able to retire in your 30s or 40s if you treat yourself to something new every week. Take a good look at what comes in and what goes out, and what you need to cut.

Start with monthly recurring payments; both the cheap ones such as streaming services and the more expensive ones such as gym memberships. Then, analyse your recent spending habits, and see if there is anything you could realistically cut down on, such as meals out and other social activities.

Don’t forget to consider any unnecessary annual payments too, as these can often be quite expensive and aren’t always at the forefront of your mind.

  1. Be strict with yourself and pay yourself first

You need to set yourself rules that you will stick to, and one of the best ways to ensure that you do is to pay yourself first. What this means is that, as soon as you receive your income, the first thing you do is pay the amount you need into your savings. You then use what’s left over for the rest of the month.

This way, you can work towards your goal every single month and it limits what you have leftover to spend. Anything left over at the end of the month is a nice, extra boost to your savings, too.

But it’s not always easy to know exactly how much you should aim for, or how to budget in the most effective way. This is where the expert help of a financial planner could be invaluable.

We can help you to achieve your financial goals

No matter your age, we can help you reach your financial goals, including early retirement, through clear planning. We will use cashflow analysis to figure out how much will be “enough” for you to retire early, which will give you a target figure to aim for with your savings.

We can also help you to stay on track and provide clarity in terms of what is and isn’t possible with your finances. We are there to help you get the most out of your money and to work with your best interests at heart.

If you’re thinking of retiring early or adopting the FIRE mentality, consider reaching out to us first to help you understand and break down the process, and create realistic financial goals moving forward. Email hello@sovereign-ifa.co.uk or call 01454 416 653.

What do our clients have to say?