Financial Independence, Retire Early (F.I.R.E) – If being able to retire is tough in Singapore, is F.I.R.E possible?
First things first. What is F.I.R.E? And what is the F.I.R.E movement about?
According to Wikipedia, ‘the F.I.R.E (Financial Independence, Retire Early) movement is a lifestyle movement whose goal is financial independence and retiring early. The model became particularly popular among millennials in the 2010s, gaining traction through online communities via information shared in blogs, podcasts, and online discussion forums. Those seeking to attain FIRE intentionally maximize their savings rate by finding ways to increase income or decrease expenses.
The objective is to accumulate assets until the resulting passive income provides enough money for living expenses in perpetuity’. The movement itself, actually ‘originated in the 1992 best-selling book Your Money or Your Life written by Vicki Robin and Joe Dominguez,as well as the 2010 book Early Retirement Extreme by Jacob Lund Fisker. These works provide the basic template of combining simple living with income from investments to achieve financial independence.
In particular, the latter book describes the relationship between savings rate and time to retirement, which allows individuals to quickly project their retirement date given an assumed level of income and expenses’. The movement is gaining momentum, as more people see the appeal of living life on their own terms, in their time, at their pace, early.
Now, I see that look of scepticism. Many have cited that retirement is but a pipe dream in Singapore, never to see the light of day. If that is the case, how then, can financial independence, and thereby retirement, be attained early?
For this article, I will focus more on early attainment of financial independence, which is really the luxury of having non-work income exceed expenses, so there is no necessity to work for money.
Retirement means different things to different people. For some, it could be a phase in life where one can relax by the beach with a cocktail in hand (as is often depicted in retirement brochures); for others, it could be a stage where one could continue to pursue one’s career (be it existing, or a new one), without the pressure of bringing in a pay cheque. Work becomes a hobby.
At the core of F.I.R.E is savings. Savings is the excess of income over expenses, which we can lock away. Without savings, it is impossible to attain F.I.R.E.
Let me also address the question of what is ‘early’, as this is subject to different interpretations. The F.I.R.E proponents actually advocate near-austere living, which helps in generating sufficient savings for financial independence at a very young age (30s, 40s). For this article though, I will approach from a slightly different angle. In the Singapore context, ‘early’ can be any point before CPF LIFE payout at age 65; for others it may be before the official retirement age of 62. Some are more ambitious, choosing age 55 as the year they want to be financially-free.
A small group may be even more aggressive, taking the lead from the F.I.R.E movement in the West, and opt for mid-40s or even earlier. This varies by circumstance and there is no right or wrong as to what age for attaining financial independence is considered ‘early’. Obviously, the earlier the desired age to achieve financial independence, the more savings we need. Should the desired savings get beyond a certain point, life ceases to be liveable and much of the joys of life dissipate.
Key Tenets and Framework of F.I.R.E
Let me use a basic framework, which includes the key tenets of F.I.R.E. I am structuring the discussion of F.I.R.E here into three parts, namely:
1. The Plan – Know What You Want
2. Income – Know What You Have
3. Expenses – Know What You Need
Savings, central to F.I.R.E, is simply income deducting expenses.
Click above image to enlarge
To reach the objective at the top, we start right at the bottom, which is the quintessential of F.I.R.E. We need a Plan and most of all, we need it early. If you are thinking of attaining financial independence at age 45, but you are now 42 and have not previously planned, it will be very onerous.
The Plan needs to include, among other things:
1. The target age for financial independence attainment.
With F.I.R.E, the target would usually be lower than the ‘normal’ retirement age as I discussed earlier.
2. Savings, broken down into:
A. The level of expenses required, post-financial independence attainment, including the effect of inflation. It does help immensely to have a baseline expense, which is the current level of expense the person is running on. Without this piece of information, there will be too much guesswork involved, which can be fraught with misjudgement.
B. Income and investment assumptions, including targeted income growth and investment returns.
The Plan provides the overarching guidance and the key is that it has to be realistic; it is pointless putting out a Plan where one has no chance of making. For example, if one assumes an income growth of 15% per annum, it is high unlikely the Plan will work. By the same token, should someone assume 20% annual returns on equity investment, a dose of realism is lacking there.
With the Plan formulated, the next thing item on the menu is the execution, which is the implementation of the Plan and translation into specific income and expense actions, on a yearly basis recommended.
On this side of the F.I.R.E equation, some things to consider are:
1. The investment strategy
The strategy has to be in line with the Plan. For example, if the Plan assumes a target return of 7%, it does not make sense to invest entire resources in fixed deposits or other low-yielding products.
2. The work/business income side
Again, this needs to be aligned to the Plan. If the Plan calls for an income growth of only 3%, the usual corporate yearly salary increment should suffice. On the other hand, should the Plan assume a more aggressive income growth, we will need to accelerate our career and ensure there is progression (with accompanying salary increase), to make it work.
3. It is very likely the income for the Plan, at the stage when you are no longer receiving a salary, is modelled on a straight-line.
Dividends and investment returns, however, seldom behave in that manner. Do consider annuity solutions to inject some linearity so that your non-work income resembles the Plan.
The crux of this part of F.I.R.E is mainly tracking of expenses, and managing the expense budget which is consistent with the overall Plan. What you cannot measure, you cannot manage. It is imperative to have a good handle of where we are in terms of actual spending, versus where we should be. There are a few things to note:
1. Expenses can make or break any Plan.
A well-thought Plan should accommodate an expense level that is realistic, sustainable and thus, possible to live to. Tracking expenses regularly (and I would recommend at least once a quarter) against the Plan will provide us with a good idea if we are on course. If off-course, we should consider addressing it sooner rather than later, lest things get out of hand and we run out of time.
2. Having an expense budget to live within, does not mean we live extremely frugally to the extent that life ceases to be enjoyable.
On the contrary, it enables us to have an indulgence without the guilt. For example, if you have budgeted for a branded handbag, you should be able to go out and shop for it with the knowledge it will not cause you to be out-of-budget. By the same token, should you splurge on something which is not in the expense budget, you will have to make-do with spending less on something else which has been budgeted for. Life is all about trade-offs. You win some, you lose some.
3. Consider carefully, managing your risks via insurance.
There are some non-negotiables here. Hospitalisation and critical illness insurance are two here. Imagine if you do not have a hospitalisation plan, you could face a hefty bill should health issues occur, which will derail your Plan. Paying premiums, unfortunately, is a necessary evil here. It provides predictability. It pre-empts nasty surprises. You take the element of uncertainty out.
Just as we do not include winning a lottery on the income side, we do not want to be saddled with a big expense hit due to issues beyond our control. With a good plan, we do not gamble. For F.I.R.E, the timeline is compressed and there is little runaway to leverage in the event of an unplanned large expense.
Once you are satisfied that you are on the right track vis-à-vis your Plan, you may want to test for robustness. For example, would you encounter some cash flow issues, without work income, should your investment portfolio take a temporal hit of 40%, as we saw when financial markets tumbled in March 2020 in the midst of Covid-19? If you stretch it further, would you still be financially independent should your portfolio take a permanent hit of 15%, which may be the case if some equities in your portfolio stay submerged under water after a crisis? This is entirely plausible scenario due to long-lasting disruption to some sectors and companies.
Attaining F.I.R.E is not entirely different from achieving financial independence at a more conventional age. Given an accelerated timeline for F.I.R.E, the critical elements are that there must be a very strong adherence to discipline and tracking, as once off-track, the runway for rectification is short.
Having set age 47 as the target for F.I.R.E and attained it, I can vouch that it is very achievable. It is actually rather easy, much easier than many think. We do not need to be a successful entrepreneur, an elite footballer in the major European leagues, or a CEO in a Fortune 500 company, to make that happen. Neither do we need to win the lottery.
All we need is a good Plan, and importantly, a high level of discipline and focus. High income can be a help if augmented by good planning and financial management. A recent article highlighted the plight of low savings among high income earners (salary more than $10,000 a month), demonstrating high income does not equate with financial planning success.
Paradoxically, the very reason that render F.I.R.E easy to attain, is also why achieving F.I.R.E is very challenging. Discipline and focus, can be an insurmountable mountain to many. The road to F.I.R.E is a long journey fraught with temptations, much like losing weight. In this day of high commercialism, there are unlimited wants with limited resources. Retailers drive their agenda through glossy advertisements. Online shopping is now a walk in the park, thereby providing another outlet for people to part with their money. There is always another car to buy, another new phone launch.
Key Points for F.I.R.E Attainment
Article by Leon Loh
The writer is a financial consultant representing GEN Financial Advisory Pte Ltd