How do you fancy working until you’re 75? No, us neither. We would prefer to retire early. But that’s the way things are going for those who rely on a state pension. In the UK, the Centre for Social Justice, a think tank which advises current Prime Minister Boris Johnson, has suggested that it will become a necessary evil much sooner than originally thought. A report released in August 2019 stated that current plans to raise the pension age to 67 in 2028 and 68 by 2046 are not financially viable, and the pension age must be raised higher and sooner. The alternative the think tank proposes is raising the state pension age to 70 by 2028 and 75 by 2035. Ouch!
This is not a UK-centric problem. Governments around the world are wrangling with the issue of ageing populations and rapidly expanding pensions bills. The fact of the matter is, if you want a choice over when you retire, you need to make your own pension provision and start as early as you can to achieve financial freedom.
If you need some inspiration, check out the FIRE concept. If you haven’t heard of it, it’s a growing movement which originated in the US. FIRE stands for Financial Independence, Retire Early, and its advocates engage in some fanatical saving and frugal living over a number of years in order to be able to retire in their 50s, 40s or even 30s. It’s all about setting target savings and investment amount and doing everything within your power to achieve that amount in the shortest timeframe possible by any means necessary: downsizing your home, downgrading your car, working a side hustle, starving the kids. Not really the last one, but you get the idea! This couple did it and retired to Portugal at age 40 with their two children.
Typical FIRE savings targets are up to 70% of annual income until you have earned 30 times your yearly expenses with a view to withdrawing 3-4% per year for living costs once you have achieved the RE part of the acronym.
Of course, the FIRE movement is an extreme one and begs the question of whether it is desirable to sacrifice everything in the present to gain the lifestyle you want in the future. And it’s worth adding that 40, 50 or 60 years without working at all may be too much for some people, which explains offshoots of FIRE such as Barista FIRE – where an individual ditches the traditional 9-5 for a job which better fits their lifestyle.
While for most of us, a more balanced approach is more desirable, the principles of saving and investing, which underpin the FIRE journey, are sound ones and a good basis for anyone wishing to accumulate wealth in order not to have to rely on a state pension when they eventually retire. The key benefit of saving and investment is that they give you a choice. Not just the choice to retire early but perhaps to obtain a work/life balance which gives you the freedom to do what you want to do when you want to do it, to spend more time with friends and family, to travel, turn a passion into your own business or simply earn passive income.
So if you don’t want to commit to the extreme figures that the FIRE movement would demand, what are good target figures to aim for to achieve financial independence? Well, these will be very personal to you and will depend on your specific financial objectives. So the first step is to work those out. This is something that many people find challenging, and that is one reason to seek the advice of a professional financial adviser. A good one will take a holistic approach to your financial situation and really drill down into your hopes, dreams and aspirations. They will help you work out target figures that are individual to you and draw up a roadmap of how to achieve them based on your income level.
If that sounds like the kind of help you need, why not get in touch with us? Our financial advisers are knowledgeable, personable and have a wealth of experience in helping individuals and families to devise a financial plan which is unique and entirely relevant to their personal situation.
Financial Independence Retire Early: Malaysia
The FIRE movement or Financial Independence Retire Early essentially revolves around the desire to achieve financial independence and early retirement. In essence, if you want to achieve FIRE, you want to be financially independent at the earliest age possible.
The most common interpretation of the FIRE movement is early retirement. However, many aim to achieve FIRE by having adequate passive income streams to spend their money and free time as they wish.
What Achieving FIRE Involves
People working toward achieving FIRE aim to save enough money during their years of working a full-time job to cover all their monthly expenses and annual expenses for many years to come. Achieving financial freedom at the desired retirement age, young as it may be, does not just happen overnight.
Beyond all the lifestyle sacrifices people need to make to save more money from their active income, they also follow a well-known technique based on two retirement strategies. The first is the 25x rule, and the other is the 4% rule. These strategies determine the savings rate people need to adhere to and safe withdrawal rates post-retirement, including an emergency fund and unexpected expenses.
The 4% Rule
The 4% rule dictates that you should be able to live off of 4% of the money in your investments for the first year of retirement. That money should be adjusted to make up for yearly inflation. It is worth consulting financial planners with advanced financial literacy regarding the expansion of your investment portfolio.
Historical data shows that living off 4% of your income for three decades allows you to utilize your retirement portfolio to account for costs.
The 25x rule
The 25x rule states that a person must save 25 times their annual salary to retire and reach financial independence. For example, if your earn RM2,000 monthly, your annual salary is RM24,000. Therefore, retiring early would require having RM600, 000 saved in your bank account.
The two rules above set you in the right direction to achieve FIRE. Although the financial world is continuously evolving, these rules serve as a standard template for reaching financial independence. Early retirement is a very attractive concept, but there is a myriad of factors to consider in real life. You will likely have to
Steps to Achieve FIRE
Step 1: Make a Money List
- All long-term care costs like a healthcare plan
- Mortgage or rent
- Annual expenses on medication
- Annual expenses on basic groceries
- Expenses associated with transportation, including public transportation
- Predicted travel cost
- Any pet-associated costs
- If applicable, children’s education
Although the list is not very exhaustive, understanding your basic living costs is the first step to becoming financially independent and gaining insight into your baseline savings rate. The calculated amount will vary between people on whether they are aiming to reach lean FIRE or fat FIRE.
Lean FIRE includes your investments only covering your most basic necessities. This means you keep your expenses low by living a frugal lifestyle.
Conversely, fat FIRE applies to high-income individuals with a higher than average net worth. Achieving fat FIRE means you don’t fully embrace a low expense lifestyle and retire with abundant savings and investments at early retirement age.
Such individuals likely reside in developed countries and have high-paying jobs, especially in the tech industry, and have had the opportunity to establish a high savings rate, enabling them to spend without concern when they retire.
Step 2: Make an Average Miscellaneous Spending List
There will always be unexpected occurrences in life, and your savings need to account for that. People tend to inevitably spend money on many things besides the basics. To become financially independent, you need to ensure that your savings rate accounts for discretionary spending.
This money could be considered your annual emergency fund.
Step 3: Insurance
To reduce your retirement expenses even further, it’s worth considering a viable insurance plan. Life insurance, healthcare insurance, or a retirement plan could put you one step ahead to becoming financially independent.
Step 4: Invest and Diversify
Needless to say, investments are a long-term solution. The more you are able to invest today, the greater the future payout will be. In this day and age, you are certainly not limited to traditional investments like stocks or bonds and rely on capital gains. Explore the world of Defi and cryptocurrency to see if it could be a match.
However, speaking from personal experience, the surest way to lose money is to invest in the unknown, so be sure to do your homework before committing.
Also, never put all your eggs in one basket, meaning it would be wise to expand your investment portfolio and invest in multiple streams.
Step 5: Make it Work
Since the ultimate goal in pursuing the FIRE movement is to retire as early as possible, it’s time to hustle harder than you ever thought you could. So explore your options and do whatever it takes to generate a steady income from numerous sources.
Essentially, you should aim to make as much money as you can in the shortest time to gain financial freedom.
What Happens After You Achieve FIRE?
The outcomes and prospective future for individuals who reached FIRE differed widely. Your goals and financial aspirations, as well as the amount most people are able to save yearly, influence your definition of FIRE.
Some people aim to live a self-sufficient life, while others are hell-bent on saving a ridiculous amount of money to live in a comfortable and luxurious retirement.
Continue Generating Income
People often think that the FIRE movement is all about retiring entirely without even working a day in your life again. This is not always the case.
Most people “retire” while still ensuring they receive minor amounts through part-time jobs, starting a business, or generating enough passive income. Although you’re not working a full-time job anymore, a passive income stream can significantly elevate the lifestyle you can afford comfortably.
The FIRE movement revolves more around taking the initiative and doing what you’ve always wanted to do with your life without being stuck in the rat race. You are financially independent without completely withdrawing yourself from society.
Thus, you don’t have to earn a six-figure income to be able to retire early. You just need to be willing to make some sacrifices to achieve your goals.
For high-income individuals, achieving FIRE means gaining complete control of your life and your time. This lifestyle frequently involves travelling to other countries and pursuing exciting personal projects. Many people wish to reach this goal because they need to focus on their well being and recover from the potentially demanding life they used to live.
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