Retiring early is not an idle dream

Why do we invest? For most people, once they get past the stage of merely dabbling at investing, the answer boils down to securing a better – or an earlier – retirement.

In other words, they’re investing so as to build up a nest egg capable of replacing a large part – or even all – of the income that they currently earn from employment.
 
At which point, of course, why go to work? After all, there’s no law that says you’ve got to be employed until your state pension kicks in.

FIRE

In recent years, an acronym has sprung up to describe this strategy: FIRE, short for ‘Financial Independence, Retiring Early’.
 
And here at The Motley Fool, we’ve long encouraged people to take control of their finances, live below their means, and invest with a view to creating that all-important financial independence.

Work because you want to

Others have caught the bug, too. You don’t have to look too far to come across websites and blogs written by FIRE enthusiasts.
 
But not everyone wants to become financially independent so as to be able to stop work, of course.
 
They just like knowing that they could tell the boss where to stick his or her job, if it came to it.
 
They also like sleeping soundly at night, knowing that redundancy announcements and staff cuts hold no fear: the monthly pay cheque has become a ‘nice to have’, not a financial lifeline without which they’d quickly sink under waves of debt.

Not an idle dream

So how realistic is FIRE?

The short answer is ‘very’. For people in their 30s and early 40s, that can be difficult to believe. At that stage in life, most people’s thoughts are on career progression, not retirement. And on mortgages, not retirement investing.
 
Turn the clock forward a little, though, and people in their later 40s and 50s start to come across people who have either achieved financial independence, or are well on the way to achieving it.
 
At that time of life, financial independence also becomes easier to define, and achieve. Children leave the nest, the mortgage is paid off, and investments have already begun to mount to a sizeable sum.
 
The realisation begins to dawn that without so many fixed outgoings each month, the sums required for financial independence are lower than might be imagined.

Where to start?

So how, then, do you go about FIRE?
 
It’s not rocket science. And the odds are that you already know most of what you’ve got to do to achieve it.
 
First, pay off any credit card and personal loan debts, and live below your means. That makes sure that cash can be steered towards investing, rather than paying interest.

And the mortgage? Well, with interest rates at historic lows right now, aggressive over-paying is probably less of a priority.
 
Meaning that there’s potentially even more spare cash that can be steered towards investments.
 
And as those investments mount, FIRE comes ever closer.

Invest efficiently

How quickly? Principally, that depends on how well those investments perform, and how much – and how efficiently – would-be FIRErs invest.
 
So, as I’ve written many times before, it’s important to focus on keeping charges low, and taking advantage of tax shelters wherever possible – ISAs, for example, and SIPP pension wrappers.
 
Which is best from a FIRE perspective? Much depends on your need to take advantage of the income tax relief that SIPPs offer to higher-rate tax payers, or to those close to that tax bracket.
 
Even so, once taking the income from your accumulated investments, the tax simplicity of an ISA is hard to beat.

Regular saving

Importantly, too, would-be FIRErs need to make realistic assumptions about how much they need to put aside each month.
 
In particular, it’s important to avoid making the mistake of thinking that you’ll not be able to invest enough to make a meaningful difference – and here, some of the calculators out there on the Internet aren’t helpful. You should be able to invest a rising monthly amount as your fixed outgoings reduce over time.
 
In practice, too, windfalls do arise, and steering them towards FIRE rather than exotic holidays or new kitchens can have a big impact on how quickly you’ll achieve financial independence.

Dream the dream

In short, FIRE – as I remarked earlier – isn’t an idle dream.
 
It can happen, and does happen. But unless you win the lottery, or otherwise get lucky, it won’t happen unless you plan for it, and put those plans into action.