The current age for state retirement in the United Kingdom is 66 for both men and women and will rise to 67 by 2026. It can feel like we are all working until we are older and older nowadays.
And yet, there have been stark government warnings about labour shortages due to people taking early retirement. Indeed, in June 2022 the Financial Times that half of a million fewer people were in paid work in the first quarter of last year than before the global health pandemic hit, with early retirement a huge contributing factor.
Ever wondered how you could be in a position to retire early? One such way is by following the FIRE method. Standing for Financial Independence, Retire Early, FIRE is essentially a collection of people who have committed to a lifestyle of extreme savings and investment, thus allowing them to take retirement significantly earlier than traditional budgets and retirement plans would allow.
With links to the 1992 book ‘Your Money or Your Life’ by Vicki Robin and Joe Dominguez, which follows the concept of evaluating every expense in terms of the number of working hours it took to pay for it. Here are five tips on following the FIRE method and working towards early retirement
1. Pay off debts
All of us would love to be putting aside significant amounts of our earnings into a tidy little nest egg, but initially, it is not always possible.
Your first port of call should be to prioritise paying off your debts, simply because the interest you accrue on debts will outstrip any savings interest you will earn.
If you have multiple debts at one time, then you should always pay at least the minimum payment on each one as you do not want the debt to build up.
From there, look to pay off the debt that has the highest interest rate first. If you have outstanding student loan debt, this can be the last one to pay off.
2. Determine how much income you will need
One of the most important steps is working out the absolute minimum you will need to spend each year to live an acceptable lifestyle – do not factor in things like holidays just yet.
You should start with the base assumption that your basic needs are not going to change too much and that by and large your wants and needs will remain the same over the next decade.
If you have followed the initial step then things such as mortgage payments and servicing debt can come off your budgets, as can expenses related to work such as travel costs.
Should you have children, they may be a little older but require financial support – this is what is known as discretionary spending, so child-related expenses can also be deducted at this juncture.
Now you will have a figure – either monthly and/or yearly – for essentials. Remember to factor in inflation to your budget, while your final years may need to take into consideration care costs.
3. Calculate what income you will receive
Just because you are taking early retirement does not mean that you will have no source of income.
Make a list of all the areas where you will be bringing in money, but do not factor in state pensions to your initial inventory as we are focusing on early retirement.
Some things that contribute to earnings here include private or workplace pension pots, income from final salary pensions, any savings and investments you have made, your home – i.e. can you downsize or release equity and other properties you may have purchased to rent out.
Make a note of each one separately to determine which would be a lump sum and which would be a regular source of income. By doing this you can ascertain whether the assets you have will be enough to cover you over the length of retirement.
4. Make wise investments
For you to have success with the FIRE method you will need to start investing early and growing your savings pot as soon as possible.
It can be difficult when there are other costs to account for, but those who follow the FIRE method invest larger portions of their income than the average person would typically want to.
By following this principle, you can grow your retirement savings to a point where you can guarantee financial stability in your later years of life.
5. Have a detailed plan and stick to it
Arguably the most important part of the FIRE moment is planning.
No matter how you plan to approach it, through a larger proportion of setting aside monthly earnings into saving pots, or by making some shrewd investments – essentially you will need to have a meticulous plan and stick to it.
Of course, you could always seek out professional help regarding estate planning and help towards retirement too.
