Should You F.I.R.E Yourself?

Many people aspire to achieve “Financial Independence, Retire Early” (FIRE) in their 40s. 

With the average lifespan of a Singaporean at 83, those committed to early retirement (FIREers) typically need about 40 years of accumulated wealth (the FIREpower) to sustain a life without a recurring paycheck.

We check out what it takes to achieve that.

The Core Idea of FIRE

At its heart, it is a voluntary transition from trading your time and labour for money to one where you live entirely off your own accumulated resources.

It usually starts with a rigorous savings regime of approximately 70% or more of your income, way above the national savings rate of 36.4%.

To turbo-charge your savings, you often need to invest them in assets that appreciate beyond the inflation rate to maximise portfolio longevity.

Once you reach your target amount, you can draw from it at a sustainable rate that secures your lifestyle for the rest of your days.

While the “holy grail” suggests saving 25 times your annual income and drawing down at a 4% rate, it really depends on how much it takes to sustain your preferred lifestyle. 

What’s Your FIREpower?

You’re on your own now – no paycheck, company-sponsored insurances, or other benefits.

Hence, you’ll need to ensure you’ve enough financial resources to maintain the lifestyle you desire for retirement. 

According to Syfe, a general benchmark is having approximately S$1 million with an annual drawdown of S$24,000 (S$2000 per month).

However, the drawdown needs to increase annually by at least 3% to keep up with inflation.  

Assuming this amount is invested in a low-risk money market fund (MMF) that continues to fetch just 3% in annual return, the amount will run out only after the 41^st year, just enough to fulfil the 40 years of drawdown required for most people:

Naturally, a higher maintenance lifestyle will require a comparatively higher initial portfolio value and/or growth.

Portfolio Types

Aside from MMFs, one can consider maintaining a portfolio with varying “buckets” of liquidity and expected returns:

• Cash Bucket: These are typically liquid, low-risk assets like Singapore Savings Bonds (SSBs) or Treasury Bills with expected annual returns in the ballpark of 2% to 3%.
• Income Bucket: Income assets can provide regular payouts, like DBS Group Holdings (SGX: D05), Oversea-Chinese Banking Corporation (SGX: O39), and United Overseas Bank (SGX: U11), which have long been staple holdings of Singaporean investors, or high-quality REITs offering 4% to 5% annual yield.
• Growth Bucket: Broad-market equity ETFs that track major global indices to maintain long-term appreciation beyond inflation. For example, iShares MSCI World ETF (NYSE: URTH) has historically fetched a 10-year annualised return of 9.38% with a lower volatility than the S&P 500.

Risks – Historical Returns Do Not Always Imply Future Returns

It’s common to use historical returns as benchmarks to project future returns – it makes one feel as if they are in control of future returns.

However, while historical returns tend to repeat themselves if the fundamentals remain intact, it doesn’t have to.

If fundamentals change, and so should you – by staying vigilant and adjusting accordingly the moment they do.

Psychology of “FIREing Yourself”

Disrupted routines and lack of social connectivity can wreak your psychology in the long run, even if it feels great initially. 

The key is to ensure your social circle stretches far beyond your work acquaintances.

Additionally, your peers are still grinding hard to achieve career progressions. 

If your self-worth is centred upon how your own credentials stack against theirs, it’s time to redefine ‘progress’ on your own terms.

Despite these psychological drawbacks, having untethered your financial needs from paychecks, one can enjoy the freedom to live on their own terms rather than societal expectations.

Like any watershed moment in life, the inertia to change can be great, but so is the potential for long-term fulfilment.

Get Smart: Know Yourself, And The Life You Want

Knowing yourself sounds like common sense, but it can be tough to visualise what really matters in life, even without knowing.

Here are some pointers that might help:

• Know your desired lifestyle: A fulfilling career is often highly valued by most people. Is your current employment genuinely unfulfilling or demanding enough to justify early retirement?
• Know your expenses: Do you track your expenditure religiously? Are there hidden ones you have missed?
• Know your returns: Are you overly optimistic about your projected returns?

The smartest FIREers are not those with the greatest financial resources; it’s those who know how to sustain them and stay committed to their FIRE journeys without regrets.

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Disclosure: Larry L. does not own shares in any of the ETFs mentioned.