Welcome to FIRE 101, the SippingCoconuts version 😉 Bite-sized and easy to understand is the name of the game for this post!
So what is FIRE actually?
Financial Independence, Retire Early. Simply put, it is a point where you have reached financial independence that work becomes optional, therefore you can retire early if you so choose.
We made a fun and short video explaining this, watch it here!
What would Financial Independence cover?
It would cover all your projected expenses for the next 30 years, minimally and in some cases leave you with some more. If you have unprojected expenses, that would affect your 30 year time-frame. If you save more than you projected, huzzaaahh!
What’s the Point of FIRE?
One word – FREEDOM! Freedom to do whatever you want without being restrained by financial considerations. Freedom to shape your life the way you want without having to work up to a ripe old retirement age because you need to. Freedom to discover yourself as you have gained more time from not working (if you choose!).
Can Anyone Reach FIRE or Is It For High-Earners?
Undoubtedly, high-earners are at a better position but anyone can aspire to reach FIRE and start a plan that is personalised around their own situation and financial requirements to then map out their journey to FIRE. There is no negative aspect of embarking on the journey as it is a journey that gives you a better understanding on your finances, your actual needs vs. wants and your aspirations along with what you are willing to do. Call it a reality check exercise if it makes you more comfortable!
What’s The Math Based On?
The Trinity Study in 1998 showed that retirement portfolios ( combination of stocks and bonds) and a 4% (inflation adjusted) annual withdrawal rate survived 95% of all retirement periods from 1926-1995. This was updated recently to cover the years 1926 – 2017 and phew, the math holds up!
What Does That Even Mean?
If you are invested in the market and only withdraw up to 4% of the total investment annually, you are covered for (minimally) 30 years if you live within that 4%.
So you would need to work backwards on what is the minimum you would need for a comfortable and fulfilling life. The larger your living expenses are, the larger the sum that needs to be invested (investment nest) so that 4% of that investment nest covers your living expenses.
This is where the famous 4% rule comes from.
Give Me an Example, Please!
If you need to live within 4%, then the inverse of that is that – your investment nest needs to be 25x your projected annual living expenses.
Example:
| Monthly Spend | $2,000 | $5,000 | $8,000 | |
| Annual Spend | $24,000 | $60,000 | $96,000 | Monthly spend x 12 |
| Investment Nest Required | $600,000 | $1,500,000 | $2,400,000 | Annual spend x 25 |
The FIRE Rules
- Spend < Earn = Excess
- Invest “Excess”
- Excess as a % of Earnings is directly correlated to how soon you reach FI @ Savings Rate
The MOST Important Rule
Your Savings Rate determines if you are on track to reach FI within your target timeframe.
High Savings Rate = Hurray!
Low Savings Rate = Great job, look for more avenues to increase the rate!
No Savings = Boo!
Shocking but the numbers do not lie, full post at Shocking Math Behind Early Retirement. Most people would be happy with a typical 30% savings rate, but note that the expected time to retirement is then almost 30 years. (!)
We made a fun and short video explaining this, watch it here!
So I Just Need to Save? That’s all?
1 more step to it and that is to invest. When you invest your savings in a safe and responsible manner (more on that below), then you are tapping into the infinite powers of compounding interest. Compounding interest is your savings on steroids. It’s also a counter-intuitive animal so an illustration works best.
Let’s say you can put aside $1,000 consistently every month for 20 years in the STI. Simple example, no increase in savings rate at all. Just plain vanilla $1,000 a month for 20 years. That’s $12,000 a year for 20 years. That’s $240,000 of savings that you are injecting into this fund in total. How much do you think you are standing on at the end of 20 years? In excess of half a million 😉 Remember, STI’s average returns at only 7% per annum so how did your investments increase by over 100%?
Compound interest baby, make it your new best friend!
Where to Invest?
The easiest and some say safest is low-fee investments like index funds. This would require no real technical knowledge and just moving with the aggregate performance of the basket of companies to reflect the general economy.
In Singapore, the STI is what you are after. Taken from the SPDR STI ETF website, you can see that the index has given an average return of 7.07% since inception:
A simplistic takeaway – if you are averaging 7% returns and withdrawing only 4% of it all, there’s a happy 3% that is still bumbling about in that basket of funds giving you some nifty returns.
You can choose other forms of investments such as real estate or actual stock picking (risky business!). The 4% rule would then need to be modified as the returns from other avenues of investments will vary from the stock + bond allocation used in the Trinity Study.
Related: Where our FIRE portfolio is going to be
We made a fun and short video explaining this, watch it here!
Key Trick to FIRE
Frugality, appreciating living on less and patience.
The math is simple, the less you need to live on (your projected expenses) then the less you would need saved up and the faster you reach that goal. Frugality can become a very fulfilling way of life, one that your soul and the environment will thank you for. Consumerism screams at us endlessly.
If you cut your expenses, you would cut your required amount of savings / required investment nest to reach FI. Some numbers to illustrate:
| Reduced expenses / month | 100 | 500 | 1,000 | |
| Annualized | 1,200 | 6,000 | 12,000 | Reduced expenses / month x 12 |
| Investment Nest Reduced By | 30,000 | 150,000 | 300,000 | Annualized $ x 25 |
What do you think about culling your expenses by $100 more every month now?
Related:
Fabulously Frugal
Taming the Lifestyle Inflation Lion / Lioness
Sneaky Money Suckers
They are everywhere!
| Daily bubble tea habit (or smoothie) | Daily Fried Snack* Habit | Weekly Movie Habit | ||
| Money Sucker | 3 | 1.50 | 13** | |
| Annualized money sucker | 1,095 | 547.50 | 676 | Extra savings / month x 12 |
| Investment Nest Increased By | 27,375 | 13,687.50 | 16,900 | Annualized extra savings x 25 |
* no names mentioned but 1 karipap / curry puff is $1.50!
** but what about popcorn?
C’mon, Live a Little!
Something I’ve heard often when someone disregards their financial Yoda and spends the money anyway for fear of being deprived. Frugality isn’t one and the same as depriving yourself however it is more about being intentionally on spending. Being mindful of what you want after doing an exercise as above and the impact that short-term item might have on your longer term plans may make you think about money very differently. Many on this journey (and this may shock you) don’t feel deprived of worldly pleasures! They simply just do not want as much as the next person or as they did before.
Related: Relentlessly Rightsizing
Alright, am sold, how do I get started?
- Find out your ‘why’. This is introspective. With a ‘why’ that is compelling enough, you can move mountains. Find your ‘why’ and make it a ‘why’ you would fight tooth and nail for. I find it grounding to think about life and mortality as I approach this.
- Track your expenses. You need to know where your money is going before you can start making intelligent decisions about your money. Most people think they don’t spend much, till they start tracking it 😉
- Work on your savings rate, aim high. Question your relationship with money and materialism. Create an inner dialogue that soon will become a habit on whether you really want to spend the money. Again, it’s fine to spend as long as it is an intentional spend and gives you the value that you want in life.
- Invest and let compound interest do it’s magic.
- Life with passion and deliberately till and after FI. Find joy during the journey and after the journey.
Related:
If not now, when?
Our Grand Plan
Hope this was a helpful post to anyone contemplating the journey or a refresher for those who have embarked on the journey. We welcome feedback as always and any healthy discussions in the comment section!
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