Updated: Dec 11, 2021
More and more young people are now considering to retire early, or rather pursue F.I.R.E (Financial Independence, Retire Early). In a recent survey shown in Today article, the top indicator of material success for young people is actually about having enough funds to retire early. This goes to show that young people are having higher financial literacy nowadays and might have already looked ahead to plan for their retirement early. This is also why reddit forums which focus on F.I.R.E are gaining more and more subscribers.
I'm also one of the young people who's considering the possibility of F.I.R.E. And I have spent some amount of time looking at how to increase the chances of success for F.I.R.E.
In this article, I want to spend some time explaining about F.I.R.E and show you that you might already be on course on a form of F.I.R.E- just that you might not have recognised it.
The above spectrum shows nicely the different levels of financial independence. This is from a brilliant site called walletburst which I will explain a bit more on the different tools which you can leverage on later in the article. But first, let me explain a bit more on the different layers in this personal wealth spectrum.
The best form of F.I.R.E is of course FatFIRE. The definition of FatFIRE differs according to individuals. To some who have an annual spending of a million dollars, their form of FatFIRE is very different from someone who has an annual spending of a hundred thousands. Generally, it means having a sum of money which allows them to retire very comfortably, above what they are spending. If you want a statistical definition to it, it may mean somewhere around 50% above the median household income. In the latest report, it's determined that the median monthly household income per household member is SGD2463. If we project it to an annual income and add 50% to it, it's probably around SGD45,000 per pax.
When you move down the spectrum, you will have just F.I.R.E and LeanFIRE. If we adopt the same way of measure as what we have for FatFIRE, F.I.R.E could mean the exact representation of the median household income while LeanFIRE could mean 50% less than the median household income. That will be a figure of around SGD30,000 per pax for F.I.R.E and SGD15,000 per pax for LeanFIRE. It's probably hard to imagine a person is able to survive with SGD15,000 annually in Singapore so LeanFIRE might not be an option suitable for all.
If you are currently not on FatFIRE, FIRE or LeanFIRE, fret not especially if you are young. You might be well on course on other forms of FIRE such as CoastFIRE and BaristaFIRE. Now, what do CoastFIRE and BaristaFIRE mean? CoastFIRE means having a sum of money which could be compounded on an annual basis so that it reaches your ideal retirement sum when you reach your retirement age. Let's do a quick example below.
For example, if you are 30 years old now, target to spend $30,000 in retirement, have $100,000 in invested assets, contribute $500 to your portfolio on a monthly basis, able to grow your investment at 7% every year, you will just be 18 years away from CoastFIRE. Once you have reached your CoastFIRE number, you will no longer need to contribute to your investments and you can afford to spend what you save yet still be able to retire with your ideal sum at the age that you want. In this exercise, you will notice that compounding effects have a huge impact on your retirement. The earlier you save up to the right CoastFIRE number for your age, the easier for you to hit your ideal retirement sum. Hence, I will strongly encourage young people to put investments as your key priority before making big purchases like car. The longer you drag starting your investing journey, the harder it is for you to retire at the age you want. A car can always wait, but your investing journey needs to start now. You can try out doing the exercise in walletburst site here.
Then what about BaristaFIRE? BaristaFIRE is a level above CoastFIRE. When doing CoastFIRE, you still need to earn money to cover your expenses even though you no longer need to contribute to your investment sum. When doing BaristaFIRE, your investments have already reached a stage whereby some parts of your expenses can already be covered by the returns from your investments without affecting your overall plan to retire at a certain age with the right amount. The reason why it's called BaristaFIRE is due to the fact that you can be doing gigs or jobs like barista instead of your usual full-time job but still be on track on your retirement plans.
Again, walletburst has the right tool for you to calculate your BaristaFIRE numbers as shown below. You may access the tool here.
The usual issue with pursuing BaristaFIRE is that you usually have to make a hard choice between continuing your day job for a few more years and hence able to reach full FIRE much earlier or becoming a barista and ending up not being able to reach full FIRE much earlier. While you still FIRE eventually through BaristaFIRE, the carrot here is that you could do so much earlier if you just stayed in your day job. Of course, the choice differs according to individuals. Some think life is short and there is no point spending a few more years in the office cubicle while some might think that their day job isn't exactly unbearable and might choose to stay in it for a few more years.
There's much to talk about F.I.R.E and I will probably revisit this topic again and provide some personal experience to it. The purpose of this article is to give you an idea of the different forms of F.I.R.E and also expose you to the tools to do your planning earlier. It's never too early to start planning for your retirement.
While you are thinking of retirement, housing mortgage and insurance plans are two big expenses that we have to manage. Please check out my articles here and here to show you how you could get the best deals in managing these expenses.
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