No longer having to work at 40: for supporters of the FIRE movement, this is the promise of financial freedom. What calls for a radical savings strategy without any special circumstances, however, raises a much more fundamental question: how much money do we need for the life we want to lead? And what happens if work actually becomes an option?
No waiting for payday on which the next rent depends. No need to stay in an unloved job just because the income is needed. For supporters of the FIRE movement, this is precisely the goal. FIRE stands for “Financial Independence, Retire Early”. The principle behind this is simple: save an unusually large proportion of your income, invest your money over the long term and thus accumulate sufficient assets to enable the returns to cover your own living costs at a relatively young age.
The idea of full retirement at 40 sounds spectacular. But FIRE doesn’t have to mean closing your laptop forever. Financial independence can also mean reducing your level of employment, taking a sabbatical or working in a lower-paid but more fulfilling occupation. Work should thus – at least in theory – change from a financial necessity to a conscious decision.
Money as saved time for living
Basic ideas that later became important for FIRE appeared in 1992 in the book “Your Money or Your Life” by Vicki Robin and Joe Dominguez. In it, the American authors view money as something for which people exchange “life energy”: in the form of working time, attention and skills. This changes people’s views of consumption. It is no longer just a question of whether you can afford a certain expense, but also whether it is worth the time you have had to invest to earn the money you need. The authors encourage people to balance everyday expenses more consciously with their own priorities. Do I really need a larger car or apartment? And how much extra quality of life will they bring me?
The calculation behind freedom
One of the FIRE movement’s best-known, but also controversial, rules of thumb is: those who have invested about 25 times their annual expenses are approaching financial independence. A simplified Swiss example shows how strongly lifestyle influences this calculation. If you need CHF 80 000 per year over the long term, you would have a target wealth of CHF 2 million, according to this rule of thumb. With an annual expenditure of CHF 70 000, the figure would be CHF 1.75 million. CHF 10 000 less expenditure per year means CHF 250 000 fewer assets required.
The 4% rule
Hinter dem Faktor 25 steckt die sogenannte 4-Prozent-Regel. Sie geht auf Untersuchungen zur nachhaltigen Vermögensentnahme im Ruhestand zurück. Daraus wurde eine einfache Faustregel populär: Im ersten Jahr werden rund vier Prozent des ursprünglichen Vermögens entnommen. Danach wird dieser Betrag jeweils an die Inflation angepasst. Wer beispielsweise mit einem Vermögen von einer Million Franken startet, würde im ersten Jahr 40’000 Franken entnehmen. Bei einer Inflation von zwei Prozent wären es im zweiten Jahr 40’800 Franken.
Behind the factor of 25 is the so-called 4% rule. It stems from research into the sustainable withdrawal of assets in retirement. A simple rule of thumb became popular: In the first year, around four percent of the original assets are withdrawn. This amount is then adjusted for inflation. For example, if you start with assets of one million francs, you would withdraw 40 000 francs in the first year. With inflation of two percent, the figure would be 40 800 francs in the second year.
For the FIRE movement, however, there is a key catch: if you want to become financially independent at 40, you have to plan for much longer periods. The underlying studies are therefore not easily transferable. In addition, they are based on historical data on the US capital market. Future returns, inflation, taxes, fees and bad stock market years can significantly alter the calculation. The 4% rule is therefore above all a rule of thumb. It provides a benchmark but no guarantee that the money will last a lifetime. In Switzerland, the pension system makes the calculation even more complex. Retirement provisions are based on three pillars: state, occupational and private provisions. If you want to be financially independent long before the normal reference age, you will therefore have to consider more than the size of your safekeeping account.
What happens when the target is reached?
The idea behind FIRE helps to make a financial goal measurable. Income, outgoings, savings rate, return, target assets: all this can be entered in a table. The question of what life should look like afterwards makes things more difficult. Former bank manager Eric Sim achieved financial independence in his forties and left his former career. His own experience means he is critical of FIRE: ”Money alone is not enough for a fulfilling retirement,” he writes in an article for the CFA Institute. Those who focus exclusively on asset accumulation during their prime years run the risk of neglecting relationships, interests and identity outside work. After all, financial wealth is only one form of capital. “Human capital” – skills, knowledge, experience and personal development – and “social capital,” i.e. relationships and social networks are additional factors. This raises another question: what do I want to do if I no longer have to work?
Work gives us more than an income
Work finances our livelihoods. But for many people it fulfils other functions. It structures everyday life, brings us together with other people, fosters skills and can convey recognition, identity and a sense of being needed. This is also shown by a study by Karsten I. Paul and Bernad Batinic on the so-called latent functions of work: Time structure, social contacts, meaningfulness, status and regular activity. The researchers conclude that people in employment have higher scores in four of these five functions than people outside of working life.If you stop working early, you don’t just get lots of time off. At the same time, the person’s daily routine, social environment and a part of their self-image and identity change.
FIRE as food for thought
Very few people will retire at 40. Many probably don’t even want to. Nevertheless, the FIRE movement contains some important food for thought: It encourages us to look at money and time together.
