Why FIRE Means I Can Retire at 41

Investor Views: Encouraged by the principles of "Financial Independence, Retire Early", Alan Donegan has been saving hard and can now stop work aged just 41 

Emma Simon 12 February, 2020 | 10:23AM
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When most people talk about retiring early, they mean stopping work in their early 60s, but Alan Donegan and his wife have managed to become financially independent decades earlier by prioritising investing over spending.

At the age of just 41, Alan is now in a position to live off his investment portfolio. While he hasn’t yet stopped working completely, he is able to choose the work he wants to do. But over the past year, this has involved taking a three month sabbatical to write a screenplay in the US.

Alan is one of a growing number of investors in the UK who adhere to the so-called “FIRE” principles — that is, achieving Financial Independence and Retiring Early. The movement started in the US but has gained more traction in the UK in recent years.

Avoiding Lifestyle Inflation

While many people would like the idea of building a million-pound portfolio by the time they are 40, Alan warns it is not for the faint-hearted. Those who follow the FIRE principles need to take a disciplined approach to saving and investing.

“We went to an event when we were in our early 30s and were completely inspired by the idea, and have stuck rigidly to the plans over the past 10 years,” says Alan. He admits to being “somewhat nerdy” about the spreadsheets that keep track of the couple’s spending and investments, and monitoring what these investments are projected to deliver over time.

To achieve their goals, the couple seriously reduced their spending to free up their money to invest. “We still live in the same small flat in Basingstoke that we bought a decade or more ago and drive a rather bashed up Skoda car,” says Alan.

The pair have also tried to avoid so-called "lifestyle inflation", where the amount you spend creeps up in line with your earnings, and try to abstain from buying "stuff", be it the latest gadgets or a new kitchen. "Too many people increase their spending the minute they get a pay rise, so they are never better off overall," explains Alan. "That means retirement keeps getting pushed further and further back. We've tried to take the opposite approach: once we've covered essential living costs, we save as much as we can."

With relatively frugal spending habits, the couple have been able to invest a significant proportion of their earnings - at some points as much as 93% of their salary would go into investments. The minimum pension contribution that individuals make under auto-enrolment, by contrast, is 8% (including employer contribution). "It's not possible to do this all the time, but we were trying to maximise savings where we could," says Alan. 

"The way we see it, we are using our money to buy freedom, rather than material luxuries," he adds. "Our aim has been to build an investment portfolio, which produces enough income to cover our day-to-day living expenses." 

Low-Cost Trackers Have Delivered

The couple have a number of investment accounts containing various Isas and Sipps - using the tax relief on pension contirbutions is a useful way to further boost money invested, says Alan. Fees are paramount, too, as paying over the odds for a fund can eat into returns over the long-term. 

"Within the FIRE movement in the US, there is a lot of support for Vanguard funds, particularly those tracking the US market," he expains. These are low-cost index tracking funds, with fees as low as 0.06%, compared to active funds which typically charge around 0.75%. 

Alan wanted to spread his risk more broadly rather than just investing in a fund tracking US stocks, however, so the lion's share of his investments are in Vanguard FTSE Developed World ex UK Equity Index fund, which tracks a basket of companies from across developed markets including the US and Japan. Top holdings are dominated by tech giants Apple, Microsoft, Amazon and Facebook. 

The global tracker has a five-star Morningstar rating, reflecting its strong performance relative to peers. According to Morningstar data, the fund has delivered annualised returns of 12.96% over the past five years.

Morningstar analyst Dimitar Boyadzhiev says: “It offers a sensible approach to gain exposure to the global-equity market. The fund stands as a strong investment proposition, offering a cheap and high-performing way to gain access to developed-world ex-UK exposure.”

Alan says these global trackers have delivered fairly consistent returns and typically generate enough income to cover the couple’s living expenses. However, he is prepared to scale back spending if the investments don’t deliver as planned. As well as their equity investments, the couple bought two small buy-to-let flats in 2015, which have also delivered a reasonable return as property prices have risen.

They are now looking to sell all three properties they own (including the one they live in) and invest the proceeds into their investment portfolio. And while Alan has stepped back from full-time work, he still chooses to work as a consultant for the training business he set up, which provides mentoring to others on setting up business without taking on too much debt. He says: “Working is great if it’s a job you want to do. But by investing you can have the freedom to chose when and who you work for.”

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Emma Simon

Emma Simon  is a financial journalist, specialising in investment and consumer issues, writing for Morningstar.co.uk