Many people ask, how do I retire early? FiRE may be the answer. FiRE stands for Financial Independence, Retire Early (FiRE) and its followers are focused on two things: cutting costs and earning more. However, they do not want to wait until the traditional retirement age to do it.

The thought of being financially independent and retiring early is an exciting one. What would you do with such freedom? Travel the world? Start a creative project without the pressure to make money? Or enjoy being at home and seeing loved ones whenever you want?

One in four 18- to 34-year-olds have set early retirement as a new financial goal after they reassessed their priorities during the lockdown, according to research by the wealth management firm Moneyfarm.

What Do I Need to Know?

Being financially independent usually requires:

  • Paying off your debts
  • Paying off your mortgage (or being close to doing so)
  • Enough income for your daily needs (e.g., from your pension)
  • Additional funds so you can enjoy life
  • Sufficient savings for emergencies

This does not necessarily demand a huge level of wealth – but it does require living within your means. The more modest your intended lifestyle, the less you will need in the way of assets.

But How much do I need?

Simply divide your Budget by your Safe Withdrawal Rate represented as a decimal (that is, 4% would be 0.04). The result is the total amount of invested assets you need to be

financially independent. Another rule of thumb is (Yearly Expenses*25) This would give you a rough indication of how big a ‘pot’ you need.

The less your expenses; the less you need to save.

Tax Considerations

Drawing in the right order can reduce tax, drawing first from unwrapped general accounts up to the capital tax allowance [of £12,300] or where the gain is reduced by previous losses, followed by investment ISAs and investment bonds. If you are 55 and therefore able to access a pension, it makes sense to draw your pension last as pension assets are not included in the value of your estate when you die and you can pass them to beneficiaries tax-free.

There are a lot of flowcharts and spreadsheets that can help you track your expenses and the best way to reduce expenses, increase income, generate passive income and more.

All of this and more are thoughts to be taken into consideration if the idea of FiRE is as cool to you as it is to me.

It is worth mentioning that it is not an easy goal to have and will require BIG changes in most people, and their lifestyle.

Just like a real fire, it is not for the fainthearted.

 

Written by Andrew Callister

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