The abbreviation FI/RE means Financial Independence/Retire Early. That’s the dream, isn’t it?
But how much does one need in order to achieve financial independence in order to retire early?
Based on articles and resources about the topic (recommended: Mr Money Moustache’s How to Retire Forever on a Fixed Chunk of Money), here’s how one can achieve the status of FI/RE.
- Do all you can to earn money, until you reach the amount you need.
- Chuck it all in investments, allowing it to earn interest.
- Make withdrawals that’s enough to fund your lifestyle, forever.
The key is to have a big enough amount so the money doesn’t run out before you die.
You can calculate how much money you need to FI/RE if you sort out these variables:
- How much you need to fund your “post-retirement” lifestyle.
- Your life expectancy (the average life expectancy for Malaysian women is 77.6 years old. Let’s just round that up to… 85… just in case).
- The rate of inflation (according to Statista, the average inflation rate in Malaysia is 3.8%).
- Your average return on investment (7.5% is a good benchmark).
FI is easy in theory, but figuring out the variables is tough. How would you know how much you’ll need after retirement? Even your year-to-year expenses vary significantly.
And what kind of post-retirement lifestyle do you want? How much would that cost? Many haven’t figured it out yet. Oh well, why not tackle the calculations first.
Calculation No 1: Annuity calculator
To calculate the amount you’ll need, try Calculator.net’s annuity calculator.
Play around with the numbers – you’ll be surprise to learn that you can withdraw RM5,000 every month for 53.6 years if you have RM810,000 in investments today.
[insert 4 graphics from ringgit oh ringgit site]
The scary part is inflation. You don’t really notice it on a year-to-year basis, but it’s clear as day in the example above. You don’t want your 83-year-old self living on an equivalent of RM677 only per month. You want comfort in your old age.
Calculation No 2: Post-retirement calculator
So obviously you need to find a calculator that takes inflation into account. “Rich, Broke or Dead calculator” answers the question, “If I start out with $X dollars at the beginning of my retirement, will I run out of money before I die?”
The calculator is not the most suitable (for example, they use US inflation rates), but it’s still nice to be able to play around with the numbers.
Apparently, RM1,950,000 will give you a 99% probability to withdraw RM60,000 annually (inflation-adjusted) until you’re 85 years old.
Can you reach FI/RE status?
RM1.95 million… that’s a big number. If you fly into a panic at the enormity of this amount, take a few deep breaths.
It’s important to remember that you must work towards achieving FI/RE at your own pace.
It’s a journey, not a destination. Make the best of life – you’re planning for 85-year-old you, but don’t forget there’s no guarantee you’ll even reach that age.
Adjust your expectations
Two things that make FI/RE easier:
- Low post-retirement expenses.
- High income and savings rate to reach the number needed.
Low post-retirement expenses
If you’re using RM5,000 per month to guesstimate the amount you’ll need for your post-FI life, it will be just enough to cover the essentials (rent, insurance, food, transportation, etc), with a little left over, excluding maybe a couple of trips a year.
You can live on less, definitely, if you try. For example, you could move to a cheap country as that saves money on essentials and satisfies the wanderlust element.
Getting the amount needed
After doing the calculations, it’ll become clear soon enough that you’ll need around RM2-3 million to safely call yourself FI. The number will change as you grow older, but it’ll do as a benchmark for now.
A lot of people in the FI/RE community make sacrifices to get the amount they need, faster.
Here are some ways:
- Adjust accommodation arrangements to lower your cost of living – move to rural areas, move in with parents, live with housemates.
- Choose to not have children.
- Live extremely frugal lifestyles.
- Earn as much extra income as you possibly can.
- Stick with high-paying but high-stress jobs.
The more sacrifices you make, the faster you achieve FI/RE status.
This article first appeared here: https://ringgitohringgit.com/financial-independence-malaysia/
Suraya is a corporate writer-for-hire and the blogger behind personal finance website Ringgit Oh Ringgit. She is more of a minimalist, less of a consumerist, a konon DIY enthusiast, a let’s-support-small-businesses-over-big-corporations kinda girl. Prior to her current role, she worked in various capacities within the non-profit industry.