Most people dream of the day they clock in at work for the last time. Most of us think that’s going to happen when we are older, but what if you could experience the liberty and independence of retirement, say, thirty years earlier?
Many believe FIRE (Financial Independence, Retire Early) means living a very limited life to put away spare cash. But FIRE, at its heart, is a lifestyle designed to live comfortably and increase savings through smart personal money management.
What is FIRE?
The acronym ‘FIRE’ means ‘Financial Independence, Retire Early’. Financial independence is not the same as being wealthy, it applies directly to the opportunity to cover monthly expenses from passive investment income.
Too few people realise the inverse relationship between feeling wealthy and being wealthy, but the moment you realize FIRE is an option, it becomes obvious.
The benefits of FIRE
Not having to work anymore is the most obvious, but FIRE’s advantages are more subtle and derive from thinking about money differently such as:
- More freedom with your time. People who retire at 35 or 40 years old have more of their lives left to do and enjoy the things they want to.
- Building a passion-filled, meaningful life. It can be empowering to retire early and fulfil your true calling.
- Learning to live within one’s means. Many people spend more as they earn more. The savings techniques needed to achieve early retirement and financial freedom teach people to live frugally, which will help them save more cash, even if they do not necessarily retire early.
- Less stress. It would remove a big cause of stress and contribute to a more fun and healthier lifestyle.
Criticism of FIRE
Any of the following must be overcome before you can retire:
- Uncertainty about the future. Social services and tax systems included in potential budgeting can change suddenly, and life can throw curveballs as well. A major illness or unexpected baby can wreak havoc on the best-laid plans for financial independence.
- Retirement can be boring. Some people who retire early battle with figuring out what to do with themselves. Without a job or other clear ambition, it may be hard to fill the time.
- Being unable to join the workforce again. If someone discovers FIRE is not right for them or circumstances demand they return to work, reintegration can be difficult. One’s skill sets may become obsolete or dated, and it can be challenging to find work, even in the best of circumstances.
- FIRE is challenging. The extreme saving methods required to achieve it and the ways it affects everyday life can be demanding.
Variations on financial independence
There are several variations of FIRE, which some argue make the idea more inclusive.
- Lean FIRE: Someone with ample passive income to cover basic needs for a thriftier, minimalist lifestyle. Some migrate to a country with a lower cost of living to minimise expenses.
- Fat FIRE: Someone with a higher standard of living who can save more than the average person.
- Barista FIRE: Some individuals leave their nine-to-five job but don’t touch their savings. They find an additional source of income, a part-time job such as a barista, hence the name.
- Coast FIRE: They have enough to cover their current expenses and conventional retirement but prefer not to touch it – similar to Barista FIRE.
The math behind early retirement
A few basic equations are used to calculate how much is needed. Then the rule of 25 applies – you must save 25 times your annual expenses and stick it in an investment vehicle before retirement.
Why 25 times? To effectively enforce the 4% rule – without depleting the principal sum, you will withdraw up to 4% of your investment portfolio each year. How much you can withdraw from this sum after you retire is calculated by the 4% rule.
The FIRE ratio
One critical number to watch is your FIRE ratio, in addition to your savings rate. It is the proportion of your monthly expenses that you will offset with your passive income.
For instance, you have a FIRE ratio of 10% of your monthly expenses that exceed RM4,000, and you currently have RM400 coming in from investments every month. Pop the champagne cork when your FIRE ratio hits 100%. You could retire and never work another day.
Keep an eye on your distribution of assets. Your investment plan should concentrate on growth at the beginning, irrespective of short-term volatility.
But as you get closer to retirement, income stability and reliability become more relevant.
The sacrifice needed
Many FIRE practitioners agree there are compromises, but learning to repair a leaky faucet rather than bringing in a plumber will not only save you money, you learn to do much more on your own.
The lifestyle is also defined by many as being physically and emotionally safe. A camping or backpacking trip with family and close friends not only costs less but can result in more amazing experiences than an expensive beach holiday
How much FIRE sacrifice you and your family need to make depends on your goals, your discretionary income and what you’re willing to give up for as high a savings rate as possible.
The true worth of financial freedom is a life focused not on money but on true freedom in time, wealth and meaningful relationships.