FIRE movement exposed: is it really possible to retire at 40?

We’ve all thought how great it would be to stop work early and live off a big retirement pot. Some are even making it happen. We look at how easy it is to do.

Wouldn’t it be great to be able to kick back, retire at 40 and never work again? Picture it now – you could have a lifetime of endless leisure activities, more time with the family, no commute and no more Zoom calls! You could take up a new career, travel the world, start a new hobby and watch Homes under the Hammer to your heart’s content.

It’s a tempting prospect, and one that many investors are embracing through the Financial Independence Retire Early (FIRE) movement. FIRE is a popular social media phenomenon that’s based on several bestsellers including Your Money or your Life  and The Simple Path to Wealth. Its followers aim to retire by 40 or even their mid-30s. Apparently, all it will take, is a combination of extreme frugality, laser-like focus and a stellar investing strategy.

But is it really possible to retire at 40? Well, for all but a lucky few, I don’t think so. And here’s why.

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How does FIRE work?

FIRE followers are pretty hardcore. They suggest that by living extremely frugally and spending as little as possible, you can save around 70% of your take-home pay. With this huge excess income, you should, they claim, be able to invest your way to £800,000 wealth, or $1,000,000 by the time you reach 40, if not earlier.

The theory goes that, used to living on a small income, you can then retire and withdraw around 4% of your investment pot to live on – around £32,000 per year.

Some followers have even more extreme predictions. One famous advocate, Mrmoneymustache, claims that “if you can save 50% of your take-home pay starting at age 20, you’ll be wealthy enough to retire by age 37. If you already have some assets now, you’re even closer than that. If you can save 75%, your working career is only 7 years.”

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Five problems with the FIRE movement

So, what are the problems with FIRE? Where do I begin?

1) Flawed savings assumptions

Let’s take the savings assumptions. Saving 70% of your income is stupidly unrealistic for most people. If you earn the UK average income of £30,000 you currently take home around £2,017 per month, meaning you would need to live on £605 per month. That tiny figure doesn’t even cover most people’s rent or mortgage, let alone bills, transport, energy costs and food.

2) Flawed investment assumptions

Let’s imagine you somehow managed to live on £605 per month for 20 years and invested the remaining £1,412. To reach £800,000 by the age of 40, your investments would need to grow an average of 8% per year. That’s an extremely ambitious estimate and very likely to be wrong. If your investments instead grew at 5% per year, you would only achieve £579,968 in total.

If you only managed to save half your income, still hugely unrealistic for most, you would end up with a pot of £414,321 by the time you reach 40 (assuming investment growth of 5%).

Save a more achievable, but still ambitious 20%, and you’d end up with £165,646.

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3) Flawed income drawdown assumptions

So, let’s assume you hit the magic £800,000 figure by the time you hit 40. Is it a sensible strategy to withdraw 4% per year from your investment pot?

Again, I don’t think so. The theory goes that the stock market will grow at 7%, you can withdraw 4% and leave 3% invested to cover inflation.

But the last six months have shown that the stock market is not predictable. If you retire at 40 you may still live for another 60 years. It’s highly likely that something will go wrong during that time, leaving you and your retirement plans up the swanny.

If the stock market only averages 5% growth, then withdrawing £32,000 per year will deplete your investment pot and you’ll have nothing left by the time you reach 81 years old. If the stock market only manages growth of 4% then you’ll run out of money when you reach a fairly young 72.

4) Missed opportunities

And, if you religiously follow the FIRE movement, you may end up with some big missed wealth opportunities.

First, in the UK, you can’t draw your pension until you reach 55 years old, rising to 57 in April 2028. That means to retire at 40 you’ll need to save outside a pension. But pension tax relief is one of the best ways to grow your wealth. Investing £500 per month outside a pension for 20 years, could grow to £205,516 after 20 years (based on investment returns of 5%). But, if you’re a higher-rate taxpayer, then investing through a pension could net you an extra £136,875, giving you a total pot of £342,391. That’s a lot of money to throw away.

On top of that, there’s the missed compounding opportunity if you retire at 40. Using the example above, if you left your imaginary pot of £342,391 for another 25 years, retiring at the normal age of 65 but not adding another penny, it would snowball to an amazing £1,191,962.

Added to this, if you retire at 40, you won’t get the full state pension as you won’t have enough years of National Insurance contributions. You’ll get £4,160 less per year than someone with a full 35-year record.

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5) Not worth the sacrifice

I’m sure you’ll agree that life is for the living. If I had my time again, I wouldn’t personally choose to live on 30% of my income, throughout my 20s and 30s, even if it was possible.

I’ve had other goals to pursue such as having kids, moving to a house with more space, eating healthy food, having a few holidays, and yes...treating myself and my kids occasionally.

And I don’t want to give up my career quite yet. I quite enjoy working. Maybe I will try to scale back in my 50s, maybe not, but I certainly don’t feel ready yet to hang up my coat.

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My investing goals

Personally, I’m aiming to retire a little early. It would be nice not to have to work until I’m 68 (my current state pension age), but I’ll make that decision nearer the time when I see what I can afford.

For me, the FIRE movement is far too extreme, and I think that managing money is more like a juggling act than an Olympic sprint. I want to save for a pension, but I also have other priorities: I want to save and invest, but not at the expense of an enjoyable full life.

Thankfully, I know that as a long-term investor I don’t have to choose between living life and investing. I can save regularly as part of my budget and use the power of investment compounding and tax relief to grow that wealth into a decent retirement income.