Article

Three steps toward FIRE (financial independence, retire early

27 April 2023

5-minute read

Plan Well Feature Financial management

Those who follow the FIRE movement craft strict budgets, which they follow diligently. (Credit: Shutterstock)

Early retirement is the ultimate financial goal for many global workers. According to the consumer research company Milieu, 60 per cent of employed residents aged 18 to 49 in Southeast Asia hope to retire before turning 50. So, it's no surprise that many find the "Financial Independence, Retire Early" (FIRE) movement alluring.

The FIRE concept was coined in the book Your Money or Your Life by Vicki Robin, Joseph R. Dominguez and Monique Tilford. It focuses on maximising savings and investments to retire earlier than the traditional age of 65.

FIRE followers practise prudent spending and investing to attain financial freedom in their 40s or 50s. They use an aggressive savings method that requires profound lifestyle changes to accomplish their retirement goal or fire number.

Calculate your FIRE number

The first step to FIRE retirement planning is determining your target retirement income, which must last for 25 years or more, with an annual withdrawal plan of four per cent.

For example, if you need US$70,000 a year to maintain your standard of living plus enough for emergency expenses and recreation, your FIRE number should be $1.75 million. To illustrate:

$70,000 X 25 = $1,750,000

The total of $1.75 million is your FIRE number, or the assets you need to retire early. Using the four per cent guideline, this amount would allow you to withdraw $28,000 annually.

Saving for your FIRE number is a big commitment. If you're 30 years old and want to retire by 50, you must save US$87,500 annually for 20 years to achieve $1.75 million. This means setting aside between 50 and 70 per cent of your income.

Commit to a FIRE Lifestyle

The FIRE movement embraces a frugal lifestyle to save more for the future. (Credit: Shutterstock)

FIRE's core principle of spending little even when you have an increased income fosters a disciplined mindset and cultivates a strong financial foundation. It enables individuals to save as much as possible for the future, ultimately leading to a more fulfilling and prosperous life.

How much to save also depends on how you foresee your spending and retirement lifestyle. The FIRE movement approaches this in two ways: Coast and Barista.

Coast FIRE enthusiasts usually save and invest much of their FIRE number decades before retirement. When they hit their FIRE number, they can "coast" through retirement because they have saved enough. But they choose to work at reduced hours to leave room to pursue their passions.

The term "barista" refers to having a low-stress, part-time job with flexible hours. Barista FIRE advocates typically set a lower retirement fund target for themselves, and instead choosing to work part-time jobs to supplement their income once they hit retirement.

Grow and protect your savings

Some FIRE movement followers increase their cash flow by taking on side jobs, such as working as a barista. (Credit: Shutterstock)

The FIRE movement prioritises emergency savings before investing. This amount, equivalent to three to six months' worth of savings, is in anticipation of rainy days and unforeseen circumstances. Once an emergency fund is set up, FIRE followers devise strategies to protect and grow their money based on their goals.

Invest in insurance

Many FIRE enthusiasts purchase insurance coverage to manage risk and provide additional financial protection for their retirement goals. In Singapore and the Philippines, more than half of the people surveyed by Milieu already invest in insurance.

AIA offers savings products that can work according to FIRE requirements. Its retirement income plan comes with life insurance to provide financial security to loved ones. But it can also supplement your savings because it can accumulate cash value. Some policies guarantee a yield of four per cent a year until maturity.

Build a passive income

The Milieu survey reveals FIRE movement followers in Southeast Asia increase their funds by investing.

Coast FIRE followers, in particular, prefer to invest in vehicles with a hands-off approach like investment funds and bank on the power of compound interest. The investment's earnings from the interest then serve as passive income, augmenting their retirement fund.

Take on side jobs

For those who need an extra boost in achieving their goal, taking on side gigs is a great option to increase cash flow and accelerate progress towards financial independence. This is especially for those who subscribe to the barista FIRE approach.

These individuals often use their newfound freedom after leaving their full-time job to accumulate savings and build a portfolio of investments that can cover their basic expenses. By embracing this strategy, individuals can enjoy greater financial security and flexibility, allowing them to focus on the things that matter most in life.

The financial discipline required for FIRE may not be the right approach for everyone. However, its principles have valuable financial literacy lessons. FIRE teaches the habit of living within your means and the value of saving, insurance and investing. Whether or not you choose to follow all of its principles, the FIRE movement can leave you financially wiser.

You can achieve financial independence with a solid money management foundation. Watch as finance experts Anna Haotanto and Lachlan Campbell of the AIA Voices community share tips you can do today to achieve financial wellness in the future.

AIA Voices is a community of influential and educational voices from around Asia to talk about life, health and wellness. A platform to educate, motivate and inspire people to make positive behavioural changes on their health and wellness journey. Providing an opportunity for communities across Asia to connect, collaborate, and learn from each other. Designed to drive AIA One Billion, our ambition to engage a billion people to live Healthier, Longer, Better Lives by 2030.

References:

TIME. 2022. What Is Financial Independence, Retire Early? A Beginner's Guide to FIRE [online] [Accessed on December 1, 2022]

CNA. 2022. IN FOCUS: Financial Independence, Retire Early - how the FIRE movement goes beyond extreme sacrifice [online] [Accessed on December 1, 2022]

Moneymate, 2022. How to Get Financial Independence and Retire Early (FIRE) In Singapore [online] [Accessed on December 1, 2022]

Milieu. 2022. Fired up: A look at Southeast Asians pursuing the financial independence, retire early (FIRE) movement [online] [Accessed on December 1, 2022]

Disclaimer:

This is general information only and is not intended as financial, medical, health, nutritional or other advice. You should obtain professional advice from a financial adviser, or medical or health practitioner in relation to your own personal circumstances.