Chasing Financial Independence Retire Early (FIRE): is it possible?

The FIRE movement has been gaining momentum around the world, as growing numbers of people see a pay-off between saving hard and early in order to “buy” financial freedom. Does it work?

At what age are you planning to retire?

For many the standard answer to this is “somewhere in my 60s or beyond”. But there’s a growing cohort of people that aim to do so much earlier.

FIRE, which stands for “financial independence, retire early”, is a way of life that’s attracting followers like, well, moths to a flame.

The idea is to live frugally during your working years, aiming to save as much as 50% - 80% of your salary. In return for these sacrifices you get to fund a longer retirement, meaning you can stop earning at a younger age.

For many followers, FIRE is about becoming free of financial worries in order to pursue other, more meaningful activities than a regular – but possibly unfulfilling – “9-5” working life.

But how feasible is FIRE? Is it achievable for those on all levels of earnings? And can FIRE savers make plans that are sufficiently robust to survive economic and market shocks brought about by seismic events such as the Covid-19 pandemic?

How did FIRE come about?

The movement started in the 1990s and has built its support base in the decades since. There are a number of key bloggers and websites promoting FIRE, presenting it both as a personal financial strategy and also to promote a simpler way of living that reduces consumption and saves the planet.

An important part of the FIRE movement are the formulas that try to inform investors how much capital they might need to amass in order to provide sufficient income for the rest of their lives. One of the better-known formulas is “the 4% rule”, for example. By assuming an average investment return of 7% per year and an inflation rate of 3%, this “rule” predicts that retirees should be able to withdraw 4% of their portfolio every year. To do so, you’ll need to have put away at least 25 times your current annual expenses. Does the 4% rule hold true? We explore this in more detail below.

The financial crisis is said to have played a part in raising the profile of FIRE. The fear and uncertainty prevailing in the years after the crisis left millennial workers anxious about the future. One response has been an increased focus on saving – as anxiety mounts about future security.

While it’s impossible to estimate the movement’s followers, it’s telling that there are just shy of 800,000 members on a FIRE reddit and Mr Money Mustache – one of the key bloggers in the FIRE movement – has seen more than 33 million unique page views since its launch.

Financial Independence, Retire Early: the basic plan

In a nutshell, FIRE requires that you cut your expenses to the bare minimum and channel every spare cent into growing your savings and investments. The sooner you do this the better so you can maximise the length of time you can be retired for.

1. Limit the outgoings. But what sort of expenses should get the chop?

It’s recommended you start with your high-interest debt: eliminate any and all of your credit card debt, personal loans and student debt. Low-cost debt, such as mortgage loans, are less of a priority as they eat less of your income.

It seems that this isn’t always the first thing people do though. The 2020 Schroders Global Investor Study (GIS) found that only 26% of respondents would prioritise paying off their debt with their disposable income.

Then you should look at your daily expenses and remove non-essentials. How draconian you want to be is down to you and your family.  But some more extreme adherents of FIRE advocate no eating out, losing the designer clothes and purses, and swapping outdoor exercise for gym memberships and training.

2. Maximise your sources of income

Reducing expenses helps maximise your savings, but so can other sources of income, such as a side-hustle. Is there a way in which you can generate more income? Extra freelancing? Taking on another project outside your regular job?

Sounds easy – so what are the problems?

Lowering expenses and increasing savings are undoubtedly worthwhile habits, so why aren’t we all doing it already?

There are practical impediments. In many countries and regions around the world, both developed and developing, some people work to get by. They don’t have the capacity to set by very much of their income.

It’s also about lifestyle. FIRE promotes a drastic change centred on significant denial. The adjustment can be difficult.

FIRE entails facing up to some potentially alarming risks. What if there’s a market crash and you lose a significant amount of your portfolio? What if you encounter an unforeseen medical expense as a result of an accident or a critical illness? What if you run out of money in your later life?

What does “early” mean? Is the aim to retire in your 30s, or 40s?  If so your money probably has to last you 40-50 years. Hong Kong, for example, has one of the longest life expectancies in the world at 84 years. That’s a whole 54 years your money has to last if you retire at age 30.

The biggest problem: calculating how much you’ll need to save to ensure you won’t run out

Figuring how much money you’ll need to last an unknown period is no small task. FIRE followers promote saving at least 25 times your current annual expenses so that by the time you retire you can rely on the 4% rule.

However, as you’ll notice, there are a number of assumptions that must hold true for the 4% rule to work.

The first of these is that your portfolio needs to grow. The “4% rule” rests on an assumption that an invested portfolio will grow an average 7% per year.

Taking very long-term views of historic market performance this assumption is feasible. However, there have been long periods where significant falls have reduced the average annual returns well below this number (and vice versa).

One of Schroders’ inescapable investment truths about the decade ahead is that returns are going to be lower over the next 10 years than they were over the last 10 years across both stock markets and government bonds. The effect is predicted to be especially pronounced with bond returns.


A third problem is time period. The original 4% rule formula assumed 7% average annual growth and 4% annual deductions – and worked out that this would reliably last for 30 years. But what if your “retirement” was longer? In a FIRE scenario it could easily be.

Working with real numbers: a Hong Kong example1 goes all out for FIRE

The following average wages and expenditures are drawn from the Hong Kong government’s Census and Statistics Department. Let’s call our case study Janet, and say she’s 28 years old.

Monthly wage HK$ 18,200
Monthly spending HK$9,253
Maximum saving HK$8,947

Based on today’s numbers, Janet will need to save a pot worth HK$2.8m in order for a 4% annual withdrawal to equal her spending today of HK$9,253 per month (or HK$111,036 annually).

Assuming Janet saves the monthly maximum and invests it earning 7% compound, she will reach her HK$2.8m target in 15 years – by which time she will be aged 43.

Will that see her out?

Exactly how long her pot will last is then down to the future performance of markets. According to the 4% rule – which is based on historic market returns, and is therefore not a guarantee – she can hope for 30 years’ income. That would take her to age 73. Her invested pot may run out before that date, or it may support income payments for longer.

FIRE: theory and reality

The calculation shows how investment formulas are great in theory – but real life works out differently.

Things start to fall apart when you’re faced with unexpected expenses, for example. What happens if you’re suddenly responsible for another dependent – a child, or parent? Or if you lose your job or become incapacitated?

On the positive side, the financial dynamics might change because you inherit a windfall or enjoy a rapid increase in earnings.

Each of these instances will alter the time it takes you to reach your desired retirement age.

Kelvin Lee, Head of Institutional Business, Hong Kong, commented: “We know the concept of FIRE has spurred many to downsize, retire, invest and change their lives. But even for those who don’t intend to do anything so radical, FIRE provides a useful blueprint for planning. Good investment will sit on a good financial plan, and that’s inevitably about building diversified investments over time to provide an income in the future.”

“While many FIRE followers gravitate towards passive products to diversify their investments, active management aims to achieve market-beating returns with less volatility. This may be suitable for the FIRE follower that wants to avoid wild swings in the value of their investments.”

1 SOURCE: Hong Kong Census and Statistics Department
Median monthly wage: HK$18,200 (latest data May-June 2019). Average monthly household spending: HK$9,253 (latest data 2014/2015)
The Hong Kong Deposit Protection Board found that the median monthly saving for Hong Kongers is HK$5,000.

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