In Focus: When Clients' Plans Change  

How to help the growing Fire generation

How to help the growing Fire generation
Photo by Yan Krukov from Pexels

The aim and means of the Financial Independence, Retire Early movement seem simple enough.

As promoted over social media and in national papers, this generation aims to save as much as possible, spend as little as possible, and invest aggressively to enable the earliest possible retirement. 

For those devotees with the circumstances and inclination, early retirement – or in this case very early retirement – is an achievable investment goal, albeit with some unique variables.

We’ve been doing some research to help Fire investors have a better chance of success in meeting their objectives.

Many Fire investors have historically followed the 4 per cent drawdown (or 25 times income) rule of thumb, to work out how much they’ll need to accumulate in order to retire.

While a helpful guiding principle, this rule was envisaged many years before the FIRE movement was born, and intended to apply for investors with a 30-year retirement.

As such, it comes with some embedded assumptions about future returns, diversification and fees. Since then, people are living longer, and the market and economic environment has changed. 

To get a better sense of the risks for a Fire investor, we looked at how things might pan out over different periods, using our proprietary forecasting model and assuming the retiree’s money was invested in a diversified portfolio that was half global bonds, half global shares. See the graph below:

It comes as no surprise that the 4 per cent rule’s probability of success declines over time.

What we see is that under the 4 per cent rule, you only have a 48 per cent chance of not running out money by the age of 90 if you retire at 50, and less than 36 per cent if you retire at 40.

Note that these figures don’t consider the state pension that everyone is entitled to. On the downside, they also don’t account for taxes or other potential costs such as investment platform, pension provider or fund fees.

Factor in the potential costs of investing (see graph two, below) and the 4 per cent rule’s efficacy shrinks even more – that the probability of living off your retirement savings for 50 years if you pay 1 per cent in fees each year more than halves to 16.5 per cent.

Having said that, with the right salary prospects and manageable overheads, the discipline of an extreme saver and an appropriate, tax efficient and investment and financial planning strategy, we do believe Fire targets can be hit.

This can be complicated, and the exact goals and plans will need to be highly personalised, which is why believe financial advisers can be of particularly added value for Fire investors. 

In particular, we recommend:

  • The creation of appropriate saving and investment goals, taking into account the realities of an intended 50 years or more in drawdown, and current market and inflation assumptions. 
  • Controlling costs: the corrosive effects of costs are well known, particularly when they compound over decades. Investors can’t control the market. They can control how much they pay to invest. 
  • Maintaining a diversified portfolio.
  • Using a dynamic spending strategy.

 By being prepared to be flexible and taking account of portfolio performance in determining the appropriate annual drawdown percentage, our research indicates investors considerable reduce their risk of depleting their pension pot, without necessarily having to spend less money over the long-term.