Ask anyone on the street if they want to be financially independent and retire young, our money is on people saying yes. Resoundingly. But if you ask if they know how to, we might get a mix of yes and no.
The Financial Independence, Retire Early (FIRE) movement has gained much traction over the years. Today, many of us slog and hustle as we double up our savings and investments just so we can realise our dream of retiring early on the beaches of Boracay with a cocktail in hand and nary a worry in mind.
So, what is FIRE?
FIRE is about having enough income to pay for our living expenses for the rest of our lives regardless of employment status without being dependent on a regular job to pay the bills.
Some FIRE proponents may make drastic living adjustments to minimise expenses, like swear off coffee altogether, not meeting friends to avoid dining bills, or set 3 alarms to wake up on time for work and avoid taking Grab.
How does FIRE work?
There are two common strategies to FIRE. The first is the 25x Rule (estimating the annual retirement income we expect to provide from our own savings and multiplying that number by 25) and the second one being the 4% Rule (a guideline to decide how much we should withdraw from our retirement funds each year). The strategies are supposed to help us build up a sufficient amount of savings during retirement, whenever that is.
But there is no definite standard for what FIRE means for individuals. Some of us may want to
- Continue working for as long as we see fit but not worry about income
- Live on savings and passive income while pursuing a passion or interest
- Retire from the workforce earlier than at 62 years old
There are three general ways of making FIRE work out:
- Retire early without changing current standards of living. We may need to have aggressive earning and investing strategies to build up a fat nest egg. Because this is about making our income as high as possible, this is known as Fat FIRE.
- Another way is to live minimally now and in retirement, cutting expenses and stretching our savings. This is what’s known as Lean FIRE.
- The third way is what’s known as Barista FIRE. This is sort of an in-between of the above two, allowing us to maintain more than a minimalist retired lifestyle funded by life savings and some post-retirement part-time income. Proponents of Barista FIRE see pursuing part-time income through our passions and hobbies as a win-win outcome.
There are 3 important tips to consider so that we can enjoy FIRE, and the road to FIRE.
1. Plan comprehensively
For this, we’ll need brutal honesty, diligence and some math skills. Start by asking ourselves key questions and doing sums to determine how much we will need to save to fund our retirement, or, if we already have been saving, whether we need to adjust our goals.
Two important questions to address are:
- How much annual income and savings do we need to sustain our desired lifestyle? (this forms the premise for the 25x rule and the 4% rule)
- How soon do we like to achieve this?
Can we finance our lifestyles?
To help answer these, consider breaking down to specific questions:
- What life stage are we at? This relates to our career (and thus, income) opportunities now and the remaining life stages we will need to fund post-retirement.
- Are we intending to further our education?
- What is our level of insurance coverage? We will need to assess our health and risks, and whether we are sufficiently covered. Missing the mark here will be disastrous since medical costs can burden our retirement sums.
- What is our remaining mortgage? How much are we paying monthly and how much longer? Do we have a home loan to service?
We will also need to assess what our individual needs are and be crystal clear about the financial implications. Take account of our income, assets, living expenses, and the “ideal life” we want to lead when we retire. After arriving at an educated forecast of our costs, do we have enough to declare FIRE? Then, do the maths, keeping in mind important potential expenses such as medical bills.
2. Save and invest early
A comfortable retirement is not cheap, especially if we have plans to travel the world, enjoy creature comforts, and pay for medical services in private hospitals or better class hospital beddings that might occur in the later stage of life. Hence, we will need to maximise the time and opportunities now to save up and earn returns.
Once we have our forecasted amount for retirement, we determine the rate at which we need to save per month. Chances are that we will realise that we should have started yesterday, yestermonth, or even yesteryear.
We will need to make our savings work harder if we intend to retire before 63 (and we’re talking about several years earlier), by investing. Many a times, we try to be an expert financial advisor and devise a sure-win investment strategy to grow our nest eggs the best way possible. Alas, the average result is that we will be making average returns as we balance risks and portfolio. Key difference is that if we start early, then we will enjoy the compounding effect of our actions over time.
3. Think beyond the traditional stock and bonds portfolio. Go For Gold
As many financial experts would remind us, we should always keep an eye and be mindful of market volatility. Resist the temptation to go all in on a particular asset class and be mindful of being overly dependent on one. Ensure that our portfolio is well-diversified so that we can enjoy the earnings and stay protected from adverse economic events.
As we are building our diversified portfolio, do also consider a generally stable asset such as gold. Gold is relevant, no matter what stage of life and financial strategy. As a safe haven asset, it will generally see us being more protected against inflation and/or risks compared to most forms of investments. In this way, we can have better peace of mind when we undertake higher-yield investments while being hedged with gold.