Fire movement: How to retire early without financial worries

PHOTO: Pexels

The financial independence, retire early (Fire) movement is a movement whereby people try to work hard, invest and live frugally. All this is done in hopes of having a happy early retirement without any financial woes.

This comes from a rejection of the typical retirement age of 65 and is free from the capitalist pursuit of employment, salaries and high-end lifestyles.

To reach Fire, one will need to save at least 30 times their yearly expenses which for most people would typically amount to around S$1 million.

Living in your retirement years, one should only be withdrawing three to four per cent of your accumulated funds yearly to ensure that they have enough to last through your retirement.

Methods of achieving Fire

There are different methods of achieving Fire and depending on your choice, it could result in varying lifestyles and different saving goals.

Fat Fire

Fat Fire is suited for the individual who does not want any compromise. These individuals want to maintain or enhance their standard of living when they retire.

As a result, these individuals will have to save significantly more than the other Fire types and be very aggressive in getting raises or investments to save within the timeline. As there is less emphasis on a minimalist lifestyle during retirement, these individuals might take a longer time to achieve Fire.

Other uses of Fat Fire could be to ensure that one will have extra savings to combat any unforeseen circumstances that may arise during their retirement period.

The Fat Fire method is most suited for the work hard, play hard individuals.

Lean Fire

Lean Fire refers to the type of Fire that is more restrictive and forces the individual to live a minimalist lifestyle in their retirement. Typically, individuals will only spend on necessities and live with a restrictive budget.

Lean Fire typically leads to less financial flexibility in retirement; however, this allows the individual to retire even earlier if they can live with a smaller monthly budget.

The Lean Fire method is for individuals who love saving and living simply within their limited budgets.

Barista Fire

Barista Fire is a little bit different from the rest as instead of retiring fully, the individual would take up a part-time job or extra gigs to supplement their retired lifestyle.

This means that they can potentially be covered by the company’s health insurance and also delay tapping into their retirement funds.

For most people, this would be a good balance and having a side gig would mean that one gets to pursue a passion that is perhaps a hobby that they were not able to do before retirement.

The Barista Fire method is more suited for the hardworking individual.

Coast Fire

Coast Fire is essentially about saving very aggressively in one’s earlier years to take advantage of compound interest that they can earn for their retirement.

This individual still continues to work normally to pay for current expenses while saving for retirement. The savings and constant income enable one to have further flexibility later in life when enjoying retirement.

This is suitable for individuals who are disciplined to save aggressively and sacrifice certain entertainment in their early life to take advantage of compound interest.

How to achieve financial independence?

Save more, spend less

This is one of the most obvious parts of the Fire movement, which is essential to allocate a greater portion of your income into savings and try to downsize your current lifestyle.

However, it is not as straightforward as you might think. Firstly, you will need to plan your big-ticket purchases early and factor them into your expenditure so that it does not come out and ruin your saving goals.

Things like house purchases and weddings will put a significant strain on your ability to meet your saving goals.

Items Average Cost
Housing $532,768
Weddings $37,100
Home Renovation $45,588
Car $125,300

Calculate your savings after deducting these expenses and you will have a clear picture of how long you need to save.

Secondly, one needs to manage their debt well. Interest costs can slowly creep up and accumulate to a significant amount.

For example, a mortgage loan can cost tens of thousands more in interest if your loan tenure is significantly longer. Credit card interest payments can also accumulate and reach an undesirable level. Ensure that you are always on top of your credit card repayments.

Here is a list of common debts for people in Singapore and their normal interest rates:

Common Debt Interest Rate
Mortgage 2.00 per cent to 3.00 per cent
Car Loan 2.08 per cent to 2.59 per cent
Education Loan 5.46 per cent and 2.15 per cent of processing fee
SME/Business Loan 0.8 per cent to 20 per cent

Relook at your debts and see whether there are any ways to lower your interest rates or refinance your home loans.

Be active in earning more

Earning more may seem to be another no-brainer, but the truth of the matter is that there are some considerations that you may not be thinking about.

If you wish to retire early, your time frame for working and earning is smaller. Given that when you’ve just started working, you will be working in a junior position and earning a relatively low wage as compared to your maximum potential earnings. This will make saving more in the earlier years harder.

With that in mind, it is important to always be active in seeking out higher-paying positions to increase your wage quickly. Beyond that, acquiring the necessary skills and knowledge is also important to show your competency and obtain a better salary.

Here is the average salary increment based on the role you’re in and the size of your company:

Firm Size Average Yearly Salary Increment Rank & File (%) Junior Management (%) Senior Management (%) All (%)
Less than 200 employees:
Admin & Support Service 3.8 2.1 1.7 3.2
Financial & Insurance Service 4.6 4.6 5.1 4.7
Information & Communication Service 2.7 4.3 3.8 3.7
Professional Services 4.0 5.3 4.4 4.6
Retail Trade 2.5 4.1 3.3 2.9
At least 200 Employees:
Admin & Support Service 4.5 3.7 2.8 4.4
Financial & Insurance Service 1.9 5.8 1.9 3.9
Information & Communication Service 5.9 6.6 7.9 6.5
Professional Services 4.0 6.8 6.6 5.9
Retail Trade 10.1 - - 8.4

Use the Ministry of Manpower (MOM) statistics as shown above to benchmark whether you are getting the right pay increment and request one from your superior. If you are not getting at least the industry average pay increment, it will be wise to move to a new job.

Do not be afraid to get a side hustle as well. Perhaps doing translation work or freelance photography on the side can earn you some extra cash that can make your saving journey a lot easier.

The 50-30-20 rule: Is it really enough?

Many would have heard of the 50/30/20 rule. This rule essentially gets you to divide your income after tax into portions of 50, 30 and 20. 50 per cent of your income will go to necessities, 30 per cent of your income will go towards want and the last 20 per cent goes towards saving.

However, this will not be enough for you to reach your goals and you may have to wait for more than 20 years even with 20 per cent of your income fully invested in a compound interest investment plan.

Year Income (After Tax and CPF) (S$) 20% Saving (S$) Total (S$)
1 38,400 7,680
2 40,320 8,064
3 42,336 8,467
4 44,453 8,891
5 46,675 9,335 42,437
6 49,009 9,802
7 51,460 10,292
8 54,033 10,807
9 56,734 11,347
10 59,571 11,914 96,598.21
11 62,550 12,510
12 65,677 13,135

13
68,961 13,792
14 72,409 14,482
15 76,029 15,206 165,723.37
16 79,831 15,966
17 83,822 16,764
18 88,014 17,603
19 92,414 18,483
20 97,035 19,407 253,946.53

By utilising 20 per cent of your savings, it will result in taking a lot more time to reach Fire. It is safe to say that this saving method is suitable for those with high spending and difficulty saving. It is for people trying to be more financially prudent and might not be as suitable for Fire.

People who wish to achieve Fire will need to save more aggressively, up to 50 per cent of their salary after tax and up to 70 per cent for extreme cases.

How to retire early?

High-interest savings account

A high-interest savings account is useful to maximise interest earnings for the money that you keep in your savings account. If you do not wish to invest too much money, a high-interest savings account would make even more sense to save money in the long run.

Credit card cashback

Finding a credit card that aligns with your saving goals will be beneficial in helping you maximise your savings while you spend. Look for credit cards with fee waiver options and those that allow you to earn cashbacks and rebates.

The cashbacks and rebates help you save on your monthly spending, by giving you a small amount back every month. It is by no means a large sum, usually ranging from $20 to $75. However, this helps you maximise your spending and comes in handy when your budget is tight.

Invest more

One of the fastest ways to shorten your time needed before retiring is to allocate more money into investments.

You should always have six to 12 months of your monthly income in your savings account to ensure that you have liquid assets in the event of an emergency. After that, put the rest of your savings into an investment instrument to get higher returns as compared to leaving it in the bank.

CPF top-up

Alternatively, you can consider topping up your Central Provident Fund (CPF) so that you can get to enjoy payouts when you reach the conventional retirement age. Besides enjoying the high-interest rates, you can also get up to $16,000 cash relief per year when you top up your own and your family’s CPF accounts.

Note that the maximum amount you can top up is the difference between the CPF Annual Limit of $37,740 and the mandatory CPF contributions made for the calendar year.

  Ordinary Account (OA) Special Account (SA) Retirement Account (RA) Medisave
Interest 2.5 per cent 4 per cent 4 per cent (only for members above the age of 55) 4 per cent
  • Below 55: Up to 5 per cent for the first $60,000 of combined CPF balances
  • Above 55: Up to 6 per cent for the first $30,000 of combined CPF balance & up to 5per cent on the next $30,000

This is a better investment option as compared to other risk-free investment plans or fixed deposits. Furthermore, by topping up early, you will have plenty of funds in your CPF to pay for your HDB down payment and mortgage repayments.

CPF’s purpose is ultimately for retirement. After age 65, members will be able to get monthly payouts as their retirement income. This would mean that your savings will probably need to last until age 65 before your CPF becomes an income source.

With a 4 per cent interest rate, it is definitely worthwhile to divest some of your savings into your CPF account.

Retirement Plan If you are aged 65 and above, you can sell the remaining lease of your HDB flat back to HDB. Learn more about how you can monetise your HDB flat here. Beyond selling your lease back to HDB, you can also invest in an endowment plan or insurance saving plan.

For example, you can choose to put your money into a saving plan like Income’s Gro Saver Flex. If you put it in for 25 years, pay $2,000 per month for 20 years and leave it for five years, you will get $753,245.00 in maturity payout. This is considering the total amount of input of $480,000.

Alternatively, you can also purchase endowment or saving plans with a 100 per cent sum guaranteed with added life or health coverage to save on life and health insurance fees.

Putting it all together

Steps:
1. Determine your required amount
  • Find out how much you need per year in your retirement
  • Multiply by 30
2. Calculating save: spend ratio
  • Look at your current income and allocate a save: spend ratio that you are comfortable with
3. Factoring in Big-ticket Purchases (House, car, wedding, kids)
  • Set a budget for big-ticket purchases like a wedding
  • Anticipate mortgage repayment and factor that into monthly spend amount
4. Think about investment opportunities
  • With the money you saved, think of how you want to invest or just leave it in a high-interest savings account
5. Consider taking side Hustle
6. Calculate years needed based on income and money target
  • With the minute details factored in, you find out how long it will take you to reach the required amount of money.
7. Actively refine methodology as you go along
Fire Goals Profile
Fat Fire
  • Have parents to take care of
  • Planning to have kids
  • Getting married
  • Young adults
  • Young working individuals
  • Only Child
Lean Fire
  • Wants a simple life
  • Not looking to get married
  • Does not have many dependants
  • Young adults
  • Students
  • Middle age workers
Barista Fire
  • Have dependants
  • Looking to pursue passion
  • Parents
  • Working adult
Coast Fire
  • Does not want to hustle for too long in adult life
  • Do not need too much of their money to be liquid
  • Students
  • Teens
  • Young working adults

This however, is not the be all and end all for Fire. Life goals and circumstances may change which can lead to more savings or less savings. The example below will demonstrate how changing life goals changes the way one looks at Fire.

A working example of Fire in real life

For the example, the starting salary is $4,000 after tax and CPF with a 3.5 per cent increase every year. The expenses do not adjust for micro-changes or inflation. It only accounts for major changes, like a new mortgage or a new child. The savings and returns are calculated by percentages and do not factor in the compounding effect.

Before this couple got together, they were studying and wanted to achieve Fire. At that stage of their life, they would be thinking about maybe Lean Fire to quickly save up in hopes of retiring early.

After graduating and getting engaged, they want to build a family together and realise that they would have to save up for the expenses in the future. This expense will also increase if they wish to have children or if their parents get older and require expensive healthcare.

In this case, they decided that as a young couple with hopes for the future, they will choose to go for a Fat Fire approach to save more for the future.

They have a BTO with 20-year mortgage repayment which will run them $1,500 a month. Setting aside another $500 to save up for the wedding and some furniture, the monthly spend will be $2,500 + $2,000 for the housing and wedding.

If they are earning $3,200 each after tax and CPF deduction, it will run up to $6,400 per month total.

Year Total Income (S$) Monthly Spending + Average of Big-ticket Purchase (S$) Mortgage (S$) Total Spend (S$) Saving (S$) High Interest Saving Account (S$)
1 76,800 36,000 18,000 54,000 22,800.00 23,484.00
2 79,488 36,000 18,000 54,000 25,488.00 26,252.64
3 82,270.08 36,000 18,000 54,000 28,270.08 29,118.18
4 85,149.53 36,000 18,000 54,000 31,149.53 32,084.02
Total 107,707.61 110,938.84

After the fourth year, they are expecting and realise that having a child is expensive and retiring at a young age is not ideal, especially considering the expenses as the child grows up. They decide to go with a Barista Fire approach where they will still have an income stream coming in to support their child’s education.

Year Total Income (S$) Monthly Spending + Average of Big-ticket Purchase (S$) Mortgage (S$) Total Spend (S$) Saving (S$) High Interest Saving Account (S$)
5 88,129.77 55,000 18,000 73,000 15,129.77 3,223.66
6 91,214.31 55,000 18,000 73,000 18,214.31 6,400.74
7 94,406.81 55,000 18,000 73,000 21,406.81 9,689.01
8 97,711.05 55,000 18,000 73,000 24,711.05 13,092.38
9 101,130.93 55,000 18,000 73,000 28,130.93 16,614.86
10 104,670.52 55,000 18,000 73,000 31,670.52 20,260.63
11 108,333.98 55,000 18,000 73,000 35,333.98 24,034.00
12 112,125.67 55,000 18,000 73,000 39,125.67 27,939.44
13 116,050.07 55,000 18,000 73,000 43,050.07 31,981.58
14 120,111.83 55,000 18,000 73,000 47,111.83 36,165.18
15 124,315.74 55,000 18,000 73,000 51,315.74 40,495.21
16 128,666.79 55,000 18,000 73,000 55,666.79 44,976.79
17 133,170.13 55,000 18,000 73,000 60,170.13 49,615.23
18 137,831.08 55,000 18,000 73,000 64,831.08 54,416.01
19 142,655.17 55,000 18,000 73,000 69,655.17 59,384.83
20 147,648.10 55,000 18,000 73,000 74,648.10 64,527.54
Total 680,171.95 502,817.11

At this stage, the couple ups their living expense due to the incoming arrival of their child. If the couple were to put $1,000 per month for 15 years into the Income Gro Saver Flex, they will get $303,292.00 after 25 years.

With the high-interest saving account yielding $613,755.95 from year 1 to 20, they will receive $917,047.95 in total after 30 years.

If they are able to live on around $2,500 per month, they could retire after year 20. At that point, they can choose to take on part-time jobs to improve their quality of life and supplement their child’s education.

Also, they will be able to draw out a lump sum after age 55 and receive monthly retirement payouts from their CPF after age 65.

Conclusion

It is possible to retire early given a certain amount of planning and financial prudence. When you decide to adopt Fire, do note that not every method is suitable for you as life goals and tolerance to low monthly spending differs.

If you have a family and children(s), you may not reach Fire as quickly as a bachelor.

Think carefully about whether you want to achieve Fire early, as this may mean choosing jobs that you do not like because it pays well and living life with very little frivolous spending to save more.

ALSO READ: 'Quit your job, live your life': South Korea's 'Fire tribe' seek financial freedom in an uncertain world

This article was first published in ValueChampion.