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How to use your child savings to join the FIRE movement and retire early

If your child trust fund or junior ISA is just coming up to maturity, retiring probably feels a very long time away!

Which is unsurprising given that the State Pension age is continually going up, meaning you could be in your 70s by the time you’re financially able to stop working.

So, if the idea of retiring young appeals to you, then the FIRE (Financial Independence, Retire Early) social media movement might help. FIRE movement followers aim to save more than they spend so they can retire early and focus on doing the things they love.

Your child trust fund or junior ISA could put you on your way to building your early retirement pot!

What is the FIRE movement?

FIRE stands for “Financial Independence, Retire Early”. It’s a popular movement that started in the US and is quickly gaining traction in the UK.

The aim is to be able to retire before the age of 60 by prioritising savings while you’re young.

Although the FIRE movement focuses on retirement, it’s more about having the financial freedom to work however much you want, whenever you want. For example, you might not want to work at all past a certain age, or you might want to work part-time or move into a career that pays poorly but makes you happy.

The main guidelines of the FIRE movement

Although being financially independent and retiring early sounds exciting, the road ahead is hard and requires a lot of discipline.

For this reason, the FIRE movement comes with some guidelines to follow to stay on top of your retirement plans.

Save more than you spend

After all, you have to save enough money to last you a few decades. Most FIRE savers put away anywhere between 25% and 50% of their monthly income, but some save as much as 70%.

It takes a lot of discipline to cut your expenses down by so much but being frugal while you’re young could make the difference between working until you’re 66 or stopping at 40.

Earn as much money as possible

This seems obvious, but if you want to retire early you’ll need to make enough money to get by now as well as later.

This could mean changing careers, taking on a second job, having a side hustle or doing freelance work. You’ll work hard now so you can relax later!

Pay off any debts

It’s important that you prioritise paying off any debts before you start saving. The interest rates on your debt are likely to be higher than any interest you would get on your savings, so paying off debt before saving could leave you better off financially.

Build your retirement fund wisely

When saving up to retire early, you’ll be saving for the long-term. This is where it’s important to know the differences between saving in cash and investing, as well as the different types of accounts available to you.

The FIRE movement recommends investing over saving money in interest-only accounts, but this is entirely up to you.

There are many options available when it comes to finding an account to put your retirement savings in. One of the most important factors when choosing between them is the age you can access the money.

You could split your savings across several different types of accounts so that you have money available at the age you plan to retire but access to another pot later on.

For example, if you chose to save or invest in an ISA, you could use this money at any time and then access your private pension at 55 and State Pension at 66 (this age limit is likely to change).

State pension Private pension ISA Lifetime ISA
Description The pension you’ll be receiving from the government, usually monthly. Any pension accounts you might have opened with an employer, or on your own. A savings or investment account with an annual limit of £20,000. A savings or investment account with an annual limit of £4,000 and a 25% government bonus.
Age you can access your money At the State Pension age, currently 66. At age 55. Anytime. Anytime to buy your first home, otherwise after age 60.

Have an emergency fund on the side

It’s important that you’re also ready for the unexpected.

The FIRE movement encourages building up an emergency fund alongside your early retirement pot to stop you needing to dip into your retirement fund if there’s an emergency.

Become a homeowner

Owning your own home could make it easier to retire early, especially if you’ve managed to pay off most, or all, of your mortgage. Money spent on rent is lost forever, but mortgage payments usually pay off some of the loan.

Being a homeowner will make the biggest difference in how you use your savings when you stop working full-time.

How much you’ll need to save to retire early

Followers of the FIRE movement have agreed on a couple of golden rules to work out how much you need to be putting away every year to achieve your retirement goal and how much you should withdraw to live on when you do retire.

These rules are known as the “FIRE formula”.

But first, you need to decide on two things:

  • your goal retirement age
  • how much you’ll need to live on every year.

Keep in mind that costs will likely to have gone up by the time you reach your ideal retirement age!

The 25 rule

Save at least 25 times the amount you think you’ll need to live off every year until State Pension age.

The table below shows how this works if you’re aiming to retire at 40.

Your age when you start saving Your estimated yearly expenses How much you'll need at age 40 How much you'll need to put away every year
18 £20,000 £500,000 £22,727
21 £25,000 £625,000 £32,849
25 £30,000 £750,000 £50,000

As you can see, that’s a lot of money to save up! This is why spending as little as possible while making as much money as you can is at the core of the FIRE movement.

It’s worth bearing in mind that your current expenses might change. For example, your mortgage might be paid off or you might have children.

The 4% rule

The 4% rule tells you how much you can withdraw from your retirement pot to live on each year after you retire.

If you have £650,000 in your retirement pot, for example, then you can withdraw £26,000 each year. Assuming you own your own home by this point, that money could go a long way!

How your child trust fund or junior ISA can help you retire early

You might not have a plan right away, but putting some, or all, of your child savings away could be one of the greatest gifts you give your future self.

Remember to only put money into long-term accounts (such as a stocks and shares ISA) that you are confident you won’t need in the next few years.

Move money into an ISA

ISAs are tax-exempt, meaning you won’t pay any tax on the money you take out. You can choose to open a cash ISA, which builds interest, or a stocks and shares ISA, which invests your money in the stock market via an investment fund.

You can open both types of ISA, but you can only put up to £20,000 in total each tax year into ISAs in your name.

You can access your money at any time, take out however much you want and use it for whatever you’d like, so you’re not tied to one savings goal if you change your mind.

Move money into a lifetime ISA

Lifetime ISAs come with a 25% government bonus on everything you save or invest. That makes them an amazing tool to help you get ahead, but they are not right for everyone.

They are designed only for people saving to buy their first home or intending to put money away until they turn 60.

If you withdraw money before your turn 60, for anything other than buying a first home, you’ll have to pay a 25% withdrawal charge on everything you take out. This adds up to more than the government bonus, meaning you’ll lose some of the money you’ve put in as well as the government bonus.

You pay in up to £4,000 each tax year, which means you could get up to an extra £1,000 a year from the government! Any money you pay into a lifetime ISA also comes out of your £20,000 a year ISA allowance limit.

Stocks and Shares ISA

With one, simple annual management charge of 1.1%, our Stocks and Shares ISA could be a good option if you're looking to invest over the long-term.

Lifetime ISA

If you want to save for your first home or for life after 60, our Lifetime ISA could help as you'll gain a 25% boost from the government on top of your savings, as well as any potential stocks and shares returns.

Our Stocks & Shares ISA and Lifetime ISA invest in stocks and shares. This means they have good long-term growth potential, but the value of your investments can go up or down and you could get back less money than you’ve put in.

Please note that if you withdraw money from a Lifetime ISA before the age of 60 and not for the purchase of a first home, the full withdrawal will be subject to a 25% Government Withdrawal Charge.

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Your investment options

When you open a Lifetime ISA or a Stocks and Shares ISA with OneFamily, you’ll be asked to choose which fund you want to invest in.