The people trying to save enough to retire by 40
For many, it is an idea of heaven – shutting down the computer one last time and leaving the office in the full knowledge that you are financially stable enough never to have to return. And all at an age that most people would consider to be barely midway through their working life.
But a growing movement is focused on just that: encouraging people towards a mixture of extreme saving, frugal living and smart investment that will allow them to stop working and put their feet up decades before their peers – in some cases, when they are still in their 30s. And the Financial Independence, Retire Early (Fire) doctrine claims that people do not need a six-figure salary to get there.
At a time when many people are struggling to ensure they have enough money when they do retire or even to get them from month to month, the idea will probably appear absurd. And that is before you hear that it often involves saving between 50% and 75% of post-tax earnings. The advocates of Fire are undaunted, however.
Saving to live a dream
Alan Donegan says he achieved his financial independence before turning 40. As a result, he is living his dream by temporarily decamping to Los Angeles to work on his movie screenplay.
Along with his partner, he has built up an investment portfolio worth £1m after saving from his income as a consultant on start-ups and from the establishment of a business training school.
They now claim that they can support their current lifestyle without having to work. Saving so much is a tall order at any age and Donegan says that instead of spending money, they invested it.
“Most people find that as they earn more, they spend more. We didn’t do that. Our motto is ‘Buy your freedom first,’” he said.
They own a two-bed flat in Basingstoke and drive a compact Skoda Citigo, which cost £5,000. “I do like a coffee in a nice cafe, but generally I spend in line with my values,” he said.
One of the criticisms of the Fire movement is that it excludes people on low incomes who may find saving any small amount, let alone half their take-home pay, impossible.
Donegan admits that saving enough may be a struggle for someone on £15,000 a year, but at £40,000, it is doable if you are willing to change your life and spending habits. But not everyone is.
“It can actually be harder for people with big incomes and spendy lifestyles to actually get to financial independence,” he said.
The resulting freedom makes the early sacrifices worthwhile, according to Donegan. “My dreams of becoming a screenwriter may never come true, but at least I’m free to give it a go,” he said.
But how can you do it?
So how much do you need to be retirement-ready? According to the principles of Fire, the target is a pot of money worth 25 times your annual spending – not salary.
So if you can get by on £10,000 a year, you need £250,000. If you need £40,000, your target is a cool £1m.
The more you save, the faster you will get there. If you set aside 10% of your income, it would take 51 years to build savings worth 25 times your income, according to Pete Adeney, a Canadian personal finance blogger known as Mr. Money Mustache, who is a standard-bearer for Fire. Increase that to 15%, and you could retire eight years sooner, he said.
If you can save 50% of your income, you can hit that 25 times target in 17 years. At 75%, it falls to just seven years.
Underpinning this is something called the 4% rule, set out in a 1998 paper by three professors at Trinity University, Texas, which states that if you keep your pot of money invested in stocks and shares you can live off the “safe withdrawal rate” of 4% a year and your money will never run out, although you may need to spend less during recessions.
The “movement” encourages followers to invest in low-cost exchange-traded funds (ETFs), with the Vanguard fund range particularly popular, as charges can be as low as 0.06% a year, against 1.5% on some actively managed funds.
This minor difference adds up over time – if you invested £100,000 and it grew 6% a year for 30 years, you would have £374,532 with annual fund charges of 1.5% a year. If the fund charged 0.06%, you would have £564,676. That’s £190,144 more, purely due to charges.
Damien Fahy, director of the personal finance website MoneyToTheMasses.com, said Fire was going mainstream, particularly among millennials. “It is an extreme version of traditional financial planning, wrapped up in an almost cult-like movement.”
However, he questioned whether the 4% rule was sustainable if you were retiring in your 40s or even 50s, as your money would have to last for four or five decades, and a lengthy stock market slump or financial emergency could throw your plans off course.
The safe withdrawal rate assumes inflation at 3% and an average investment return of 7%, which is by no means assured.
“If your money starts running out, you might struggle to return to the workplace if you’ve been out of it for a long time or ill,” he said.
Stephen Lowe, communications director at retirement advisers Just Group, said the vast majority of people were not saving enough to retire at 65, let alone 45.
“For most, Fire is little more than an abstract idea but if it captures people’s imagination, that’s got to be a good thing,” he said.
It’s not for everyone
Lynn James, who writes the Mrs. Moneypenny blog, argues that Fire is only realistic “if you have a big salary, low mortgage and no children”. And not everybody wants to spend their 20s being frugal. “At that age, I wanted to travel the world, eat amazing food, go to concerts and experience life.”
James’s parents died aged just 58 and 63, before spending any of the money they saved, and that has made her sceptical about planning too far ahead. “It is totally sensible to save more when you’re young, but also life is for living.”
Jamie Jenkins, head of global savings policy at Standard Life Aberdeen, said Fire was beyond most people’s reach, but the underlying principles of financial discipline were good. “Everyone should be looking to save around 15% of their salary into a pension, more if possible,” he said.
Another argument against the movement is that work gives value and purpose to many people’s lives, and retiring early may leave a void as a result.
Fire has its critics but makes sense to Fiona Silk, 40, a landscape designer from Penge. “A large part is about reduced consumption and mindful purchases, rather than blowing cash on things that are ultimately meaningless. That all that gets lost in the furore about retiring early.”
With a current net worth of well under £100,000, Fiona did not expect to be able to retire early. “However, there is a good chance I won’t have to bust my guts until 65 and will be free to take on less work or more meaningful work. Others might reach that freedom much earlier, if they don’t blow their pay on booze, holidays and meals like I did when I was younger.”
Minimal living to the max
At the age of 26, Alvar Damen is saving £1,500 a month towards retirement but would like to go even further.
“My aim is to earn as much as possible, spend the minimum and save the maximum. That way I can be financially free sooner rather than later,” he said.
The Dutch national has lived in Edinburgh for two years and has a podcast called Financial Independence Europe. He benefits from rent of £675 a month, considered low for the centre of Edinburgh. “I walk everywhere, including to work, so I don’t need a car.”
He also avoids wasting his earnings from his IT job and side projects on “itty-bitty things”. “I keep recurring bills down such as energy and insurance, pick up money hacks at Moneysavingexpert.com, and shop at Lidl,” he says.
Damen invests his £1,500 into an index tracker fund from Vanguard, which invests in a spread of global stocks with an annual charge of 0.25%.
He uses his tax-free Isa allowance and is saving for a property deposit using the Lifetime Isa, which pays a 25% government-funded bonus worth up to £1,000 a year, if you save the maximum £4,000 (which he does).
Damen’s aim isn’t to stop working, but to achieve freedom. “So if I don’t like my boss, I could take on a less stressful job, or something less commercial. If you’re financially independent, you can do whatever you want.”
He still wants children, even if they are costly. He says: “You might have to work a few more years, or save a bit less, but it can be done.”