Early Retirement: Pipe Dream or Plausible?

If you believe the Guardian (Amelia Hill, 29 Mar 2017), the concept of a retirement is on the brink of extinction. The country’s median age has been creeping up just as the public pension system starts to burst at the seams. People are living longer while also saving less for their later years.

With little money to support themselves as they get older, many Britons are being forced to work past their expected retirement age and some may have to work forever. However, on the other end of the financial spectrum is a growing cohort of young professionals who haven’t just planned for retirement but are actually aiming for financial independence while they’re still young.

The so-called FIRE movement, short for ‘financial independence, retire early,’ is now sweeping across the world. Popular among millenials and digital natives, the movement encourages maximising the savings rate by living extremely frugally for extended periods while trying to maximise income and investment returns in a number of ways (Chris Stokel-Walker, BBC, 2 November 2018).

FIRE proponents are, by all measures, a rare breed. Most young people are struggling financially. According to the Office of National Statistics (Kate Hughes, the Independent, 8 October 2018), the rate of homeownership has dropped in recent years, a third of young people have more debt than assets, and half of all millenials have no savings at all.

Yet for every broke 20-something is another savvy 20-something planning on retiring before the age of 40. Thousands of people claim to have followed the FIRE model to become financially independent early in life so that they can concentrate on raising children, traveling the world, or pursuing passion projects.

A closer look at the FIRE model reveals just how feasible it is. Research published by insurer Royal London (Kate Hughes, the Independent, 8 October 2018), indicates that the average person needs to set aside nearly £260,000 to retire comfortably. Assuming an individual can set aside half of the UK median income of £29,000 every year and earn a rate of return of 4% annually, this threshold can be surpassed in 14 years. This means a savvy saver who starts implementing the model right after graduation (age 21) can realistically retire by the age of 35.

Bear in mind that the model allows for flexibility and savers can hit their goal by earning more than the median income or saving at a rate higher than 50% of UK average income. However, implementing the model requires immense sacrifices - no expensive holidays, car ownership, or frequent lattes while working harder than the average citizen and perhaps living in shared accomodations for over a decade.

Economically, the FIRE model is definitely viable. However, the drastic changes in lifestyle and immense sacrifices required may make the strategy untenable for most people.  

The value of investments and income from them may go down as well as up and you may not get back the original amount invested.