Home / Opinion / Dreaming of retiring early? The F.I.R.E. plan is about to get even tougher

The “financial independence, retire early” approach, which trades spartan frugality now for an early retirement later, can work in the right conditions, but its benefits may be eclipsed by the sacrifice required along the way, writes Alteris Financial Group's Jaxon King.

A spartan retirement strategy like the one espoused by F.I.R.E. devotees may be effective, but it’s hard to make a case for its application when the prospect of living with it is so dour that it turns people off saving for retirement in the first place.

F.I.R.E., which stands for financial independence, retire early, is theoretically pretty straightforward. It’s predicated on the idea that by aggressively saving and dedicating between 50 per cent and 75 per cent of one’s income to saving and investing, people can gain financial independence as quickly as possible with the option to retire as early as possible.

It began with the 1992 book Your Money or Your Life, by Vicki Robin and Joe Dominguez. In 1994 US-based financial adviser William Bengen simplified the message by saying that if someone saved 25 times their annual living expenses and withdrew 4 per cent of their savings each year in retirement, F.I.R.E can be achieved.

This approach started to become popular in the 2010s as interest rates fell, before social media took a hold and really gave it a boost, especially during the pandemic.

Although there is no hard and fast rule about how long F.I.R.E should take to achieve, it’s safe to say that on an average income, this could take upwards of 10 years. Proponents of the concept say it was quite simply about practicing frugality; cut Netflix and takeaway coffees – that kind of thing.

But even with the most elaborate daily coffee habit, that doesn’t add up to 50 per cent of income.

Being frugal would have to be an obsession. Holidays are off the cards, and to be redeemed when a person is retired. Weekends away are scrapped. A friend’s wedding in the Hunter Valley? Not on this budget.

There need to be a lot of variables working in your favour for F.I.R.E to be successful. The last 10 years of low interest rates would have been an ideal period to get it going, but the last 18 months would have been problematic. After 11 consecutive interest rate increases, savings are harder to put away, which would derail the strategy pretty quickly. If expenses can’t be trimmed from other areas, this would surely delay the optional retirement date.

In addition to religiously sticking to the strictest of budgets, a certain level of financial nous is required to make F.I.R.E work. There are multiple ‘communities’ people can join on the journey, but they need to understand what their approach will be. Not only do you have to develop a rock-solid thesis, but also stick to it over time and not wavering during market volatility.

The psychology of F.I.R.E. is what matters. Money is a key contributor to stress. If someone is constantly worried about investing their surplus funds, this can’t be good for their mental or physical health. If someone is embarking on this strategy to have the option of retiring early, shouldn’t they prioritise their health to ensure they can get there in the first place?

One thing is evident about these communities: F.I.R.E fans are obsessive about it. It becomes a lifestyle to brag about once it has been achieved. And those who achieve it should be proud because it takes a significant amount of dedication and sacrifice. Some of the more well-known graduates of F.I.R.E tend to go on and teach others about their experience. Given the discipline and constant research required, this mindset is to be admired.

But if frugality becomes someone’s modus operandi, can they just switch it off and start enjoying life and spending more when they do retire? Surely it would take some rewiring of existing habits to do this.

And even then… was the sacrifice worth it?

Consideration should be given to F.I.R.E.’s opposing strategy. The approach being, spend your time and surplus funds on experiences with your family whilst your health permits – saving casually. It may not have a catchy acronym like F.I.R.E, but it does take advantage of the present day and doesn’t hold the risks of variables associated with it.

If you have children and your goal is to be able to retire and spend more time with them, you may want to consider doing it while they’re young and still want to reciprocate. Teenagers aren’t renowned for wanting to hang out with their parents.

Whilst F.I.R.E is marketed to everyone as being achievable over time, there are a lot of factors to be considered before and during this process. It’s an admirable goal, but a tough one, and a high interest rate and inflationary environment aren’t ideal circumstances for one to start this journey.