Ultimate Guide to Financial Independence, Retire Early (FIRE)

In an era where the traditional retirement age seems to be pushing later and later, a movement is gaining momentum, advocating for financial independence and early retirement. It's called FIRE, and if you've been curious about what it entails, this comprehensive guide is here to light the way.

What is Financial Independence, Retire Early (FIRE)?

In Singapore, the traditional retirement age stands at 62. However, there's a rising trend among millennials who wish to retire as early as their 40s or even before 35. Historically, people saved patiently to achieve financial independence in their later years. Nowadays, a significant number are rushing towards early retirement, driven by the aspiration to live life on their own terms. This trend has given rise to the FIRE (Financial Independence, Retire Early) movement.

FIRE advocates aim to save a staggering 70% or more of their full-time income. The ultimate goal is to save 25 times one's annual expenses and limit annual withdrawals to 4% for living costs. Practicing FIRE demands rigorous planning, stringent frugality, and wise investing. While some extreme adherents cut out all luxuries, including dining out, more moderate followers simply want to amass enough savings to maintain their current lifestyle without the regular 9 to 6 job.

The growing traction of FIRE is attributed to two main factors. First, financial insecurity is rising in Singapore due to inflation and stagnant growth, leading many, especially the younger generation, to prioritize financial stability over milestones like marriage or home ownership. Second, job disillusionment is rampant among millennials. Studies indicate low workplace engagement both in the US and Singapore, with millennials particularly feeling disconnected.

For FIRE, the goal isn't necessarily to never work again but to have the freedom and flexibility to choose how you spend your time, without being tied down by financial constraints.

In short, FIRE is about having options. 

What is your 'FIRE' number?

The FIRE number is essentially the amount of money you need to have saved and invested to live off the returns without ever touching the principal amount. Determining your FIRE number is a crucial step in the journey. This number varies based on your personal living expenses, desired lifestyle, and the rate of return on your investments.

To calculate your FIRE number, consider the annual expenses you expect to have in retirement. Using the 4% rule (a common guideline in the FIRE community), multiply your yearly expenses by 25. For example, if you expect to need $40,000 a year to live comfortably, your FIRE number would be $1 million. 

Note that this $40,000 is mean to be increased along with the inflation rate. As an example, if the inflation rate is 2%, in the second year you will withdraw 1.02*40000 = 40,800.

The number 25 is simply calculated by taking 1 divided by 4%. If your withdrawal rate is dropped to 3%, then you need to save up to 1/3% = 33 times your annual expenses. 

Types of FIRE

There isn't a one-size-fits-all approach to FIRE. Over time, enthusiasts have identified different flavors of FIRE to suit varied lifestyles and goals:

Lean FIRE: This is for individuals who prioritize retiring as soon as possible and are willing to live a minimalist lifestyle to achieve it. They aim for a lower savings amount and are frugal both before and after retirement.

Fat FIRE: On the opposite end, Fat FIRE enthusiasts aim for a more luxurious lifestyle in retirement. They save and invest more, targeting a higher FIRE number to support more lavish expenses.

Barista FIRE: This is a middle-ground approach where individuals achieve financial independence but choose to work part-time jobs (like a barista) to cover some expenses and maintain social connections.

Coast FIRE: In this approach, individuals save enough early on, then simply let their investments grow without adding more funds, coasting into retirement without the pressure of aggressive saving.

I believe I practice Lean FIRE, though I will say it is a mild form.

Pros of FIRE

FIRE offers millennials an escape from jobs they never truly enjoyed. With sufficient savings, FIRE followers can chase their passions, opt for less stressful jobs, or leave a once-dreamt job that turned constraining. It encourages people to rethink their careers, emphasizing the pursuit of a true "calling" over mere monetary exchange.

In short, the pros of FIRE are:

Flexibility: Achieving FIRE allows you to decide how you spend your time, whether that's traveling, pursuing hobbies, or even starting a passion project.

Less Financial Stress: With a substantial nest egg, financial worries often diminish, leading to better mental well-being.

Opportunity to Re-invent: With the need for a 9-5 removed, you can explore new careers, learn, and grow in different directions.

Cons of FIRE

However, FIRE isn't flawless. Some practitioners, despite achieving financial independence, remain anxious about money. Others feel trapped in high-paying jobs that hinder their financial aims. An overarching sentiment is that over-frugality can sap life's pleasures. While financial prudence is commendable, moments like splurging on memorable vacations or treating oneself occasionally can enrich life in immeasurable ways.

In short, the cons of FIRE are:

Sacrifices: To save aggressively, you might need to forgo certain luxuries or experiences in the present.

Market Dependency: Your financial health becomes closely tied to market performance. Downturns can be stressful, especially if they impact your FIRE number.

Social Implications: Early retirement can sometimes lead to feelings of isolation or disconnect from peers who are still in the traditional workforce.

Is FIRE for you? Personally, I found pursuing FIRE to be worthwhile and enriching. There is nothing wrong with living frugally. 

You may want to check out more articles below:

Investing for retirement

How to FIRE movement goes beyond extreme sacrifice

By wanting to retire early, millenials are subverting conventional ideas of work and finances