If you build a balanced, diversified portfolio earning 5% p.a., you’d only need to start with as little as S$2,000 principal amount and afterwards, contribute S$1,500 per month (or S$18,000 per year) via dollar-cost averaging.
Projected investment portfolio (40-year period)
Target portfolio sum
S$1.96 million** - S$153,000 = S$1.8 million
Annual return rate
~ 5% p.a.
Monthly contribution (DCA method)
~ S$1,200 per month
With realistic goals, consistency, and discipline, the road to growing a S$1.96 million wealth portfolio doesn’t look so intimidating, now does it? But now, let’s look at F.I.R.E. retirement.
*Formula = Retirement sum / [(1 + inflation rate) ^ number of years]
**Formula = Retirement sum x [(1+inflation rate) ^ number of years]
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Why F.I.R.E. might be successful
Before we can address potential pitfalls, we must first examine what are the typical traits or success factors contributing to achieving F.I.R.E.
1. 3.3% is the new 4% rule
The creator of the 4% retirement rule, Bill Bengen, posited in his 1994 “Trinity Study” that you should be able to comfortably withdraw 4% of your retirement savings each year. Withdrawing 4% in the first year of retirement is straightforward. In the subsequent years, you’ll need to adjust the withdrawal amount to account for inflation.
Thus, experts recommend for retirees build a portfolio of about 25 to 30 times their estimated annual expenses.
However, according to a recent study by Morningstar, the 4% withdrawal rate is deemed as too aggressive now. Instead, a new 3.3% withdrawal rate is proposed. This assumes a 50/50 stock and bond portfolio split, in order to leave the principal amount untouched and a “self-replenishing steady flow” of passive income for at least 30 years.
It’s crucial that retirees are flexible in spending during their golden years. The more flexible their spending is, the higher the chance of raising the withdrawal rate over time.
2. Lean F.I.R.E.: Save like no tomorrow, invest for the future
Ditch the 50/30/20 rule, and save between 50% to 70%. There’s no such thing as a conservative saving approach when it comes to F.I.R.E.
Initially, you’d want to dedicate your savings to building an emergency fund. An emergency fund should be worth three to six months of your income. This is one of the first non-negotiables of personal savings, not even if you’re on a tight budget.
Once done, re-allocate this "savings" percentage into investments instead. The composition of your portfolio depends on your risk appetite.
💡 Pro-tip: For those preferring to invest conservatively, investing in blue chip stocks, ETFs, mutual funds, index funds, bonds, etc. might be up your alley.
3. Fat F.I.R.E.: Balloon your income
This is the less conventional method of achieving F.I.R.E. Unless you’re self-employed, chances are, your main income flow is dictated by someone else. You wouldn’t have the authority to increase your salary on a whim.
Therefore, a more realistic approach to Fat F.I.R.E. would be to generate multiple revenue streams (e.g. side hustles) to increase the breadth of your earning power, rather than depth.
4. Earlier financial headstart
This is another condition of F.I.R.E. shrouded in controversy.
Understandably, those coming from a wealthier family background with no financial burdens nor dependents like the elderly or children under them (e.g. sandwich generation) are more predisposed to financial independence earlier on. They have greater access to financial resources and fewer obstacles, allowing them to save and invest larger sums at a time.
Although this isn’t a necessary condition to retire by your 30s, such a headstart is definitely helpful if you’re wise and prudent with your money.
5. Open conversation around shared financial goals
For singles, personal finances are a rather private affair. On the other hand, finances among couples function more like an open book.
As a couple, it’s important to work as a team.
After all, you’re working towards a house, a family, and retirement together; you’re earning and investing for your joint future. Therefore, being transparent about each other’s financial goals is necessary if you intend to retire early together.
That said, everybody’s money management and habits are different. It doesn’t have to align perfectly, but you guys should more or less be on the same page with each other.
For instance, you can share the same savings goal, but the method to achieve it respectively might differ. Or perhaps your partner might earn more than you, hence the contributions have to be proportional.
6. High productivity drive
Last on this list, we have a high productivity drive. While high productivity is praised and rewarded in a meritocratic society, hustle culture can potentially become toxic productivity.
We place too much emphasis on “chasing the daily grind”, causing many Singaporeans to feel easily burned out or susceptible to imposter syndrome.
Chasing F.I.R.E. is a fairly demanding lifestyle and requires significant sacrifices when young. You’d have to eat out less, socialise less, travel less, and the list goes on. It can be tiring to be constantly hyperconscious of your daily expenses to such a degree.
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Why F.I.R.E. might be unsuccessful
1. Requires discipline and sacrifice
As mentioned above, the F.I.R.E. is not for “chill” individuals (no pun intended).
It requires a certain tenacity, discipline, and motivation to live an extremely frugal lifestyle for about a decade before, hopefully, retiring successfully.
At first, many severely underestimate the sacrifice needed; the discipline to drastically cut down expenses is harder than anticipated.
Many people tremendously overestimate their ability to change their lifestyle habits and cut costs overnight. They lack the willingness to sacrifice their comfort on more extreme ends.
After all, generating approximately S$1 million worth of savings and investments in your 20s to early 30s is no easy feat. For some, it seems more like a pipe dream.
2. Difficulty in maintaining overall expenses
Forget about cutting costs, some people fail to even manage to maintain a low annual expenditure. This is because your income naturally increases as your career progresses over time.
This increase in income leads to a corresponding increase in spending power. This makes it harder to resist consumerism, given the stronger inclination to spend more.
Remember, F.I.R.E. is not about maintaining a proportionate ratio between expenses and income. You have to continuously keep your expenses low (as when you started out) as your salary grows. It’s easier said than done.
3. Investments may underperform
Despite the stock market historically performing between 8% to 10%, investments can still underperform.
Factoring for your portfolio allocation and risk appetite, investments may underperform to the point where you wind up outliving your supposed “self-replenishing” funds.
You’d probably have to take up a part-time job, side hustle, or depend on your loved ones to support the remainder of your retirement — which is, of course, less than ideal.
4. Retirement costs might go up
Now, this is an interesting concern because F.I.R.E. is all about planning a retirement fund that’ll last for decades.
It’s all founded on current assumptions and projections of what future economic climates might look like — for example, it depends on assumptions like average year-on-year inflation rate, estimated costs of living, life expectancy, lifestyle habits, and so on and so forth.
In your later years especially, healthcare costs are another major factor. You can secure all the necessary insurance coverage in your youth, but your state of health is largely unpredictable. Your insurance can only cushion your healthcare costs to an extent before you need to draw on your funds.
Why some people might disagree with F.I.R.E
To understand these reasons, we must first ask ourselves some questions:
- “How ‘retired’ do we want to be?”
- “Do we want to retire or do we just want the option of retiring?”
- “What do you define as ‘fruitful retirement’?”
By now, it’s clear that the tenets of F.I.R.E. are based upon extreme frugality measures.
1. Not practical for everyone
Although the F.I.R.E. approach has proven useful in helping many retire early, its premise relies on one major (problematic) presupposition: you'll need to earn a substantial income even if you save aggressively.
Here are some calculations to visualise:
Assuming a target S$900,000 portfolio with 5% returns per annum over a decade, you'd need to be contributing at least S$5,800 per month for 10 years straight to achieve this lofty goal.
And if S$5,800 technically comprises 50% to 70% of your take-home pay, your gross income needs to be around S$8,825.
For context, the median salary of a 35-year-old in Singapore is only S$6,102.
So even if you work and save meticulously since 25 years old, you won't be capable of financing a S$5,800 monthly contribution into your investments just to attain a S$900,000 portfolio by 35.
Notwithstanding monthly contributions, you'd otherwise need at least:
- A principal amount of S$458,000.
- Have a portfolio growing at an annualised rate of around 34% p.a. (while investing S$1,200 per month).
These scenarios aren't the most feasible for the average young adult that just started working. No matter how much you save until 35 years old, the chances of you hitting a S$900,000 portfolio are slim.
💡 Fun fact: The top annualised returns reported by roboadvisors like Syfe and Endowus only averaged between 16% to 20% p.a. in 2021.
The only workarounds to this are:
- You're earning an S$8,000 salary from the get-go,
- Come from a wealthy background, or
- Have multiple income channels amassing more than S$8,000.
Out of these, the third option is a popular tactic adopted by many in the workforce today.
Relying completely on your main job as your only source of income lands you in a vulnerable position anyway, especially in times of rampant retrenchment and recession.
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2. Not everyone wants to retire early
Detractors of the F.I.R.E. movement agree with the importance of saving and investing early but disagree with its extreme practices.
Early retirement isn’t for everyone.
This might come as a shocker for some, but it’s true. Some people simply don’t mind retiring at a natural old age and spacing out their youth with a good mix of hard work and leisure.
A good illustration of this is the popular “I want to retire on a beach” example.
Picture this: Initially, lounging on a beach doing nothing on holiday sounds amazing, but soon after, its novelty wears off and it becomes boring. They start looking for meaning in life elsewhere in the form of chasing passions, interests, and — guess what — taking up a job they actually like.
With the average life expectancy increasing each year, many don’t realise that early retirement truly lasts long. It might not be as fulfilling as you might’ve hoped for.
In fact, most people don’t necessarily hate having a job nor intend to stop working altogether during retirement. They just want the freedom of option. By attaining financial freedom early on, it allows us to choose whether or not to have an active income or not.
3. Retirement is a spectrum
The F.I.R.E. movement is less so about how much we need, but rather how much we want. It operates upon a gradient of how well we desire to live.
For the average financially stable person, their lifestyle is often independent of their savings. Because after accumulating enough wealth, money becomes more like capital.
It’s used less for materialistic purchases and merely reshuffled around your investment portfolio instead. Maybe you’d invest more in blue chip stocks like Apple or Google because of current bear market conditions.
Money becomes a tool that you trade in for time; more time to spend with loved ones, more time chasing your passions and hobbies, and more time exploring the world. Ironically, it’s an enabler of freedom to chase things unrelated to money itself.
4. Gentler alternatives of F.I.R.E.
Judging how the standard iteration of F.I.R.E. might be too intense for some, the community has proposed gentler iterations. These variations emphasise less on growing wealth exponentially and treat F.I.R.E. as a general approach or attitude towards managing personal finance instead.
Refers to accumulating enough investments to cover retirement and then leaving them on “autopilot” growth via compound interest so you can “coast”
Refers to building up a sufficient portfolio to cover your basics, then work part-time to cover the rest
Opposes amassing a wealth of investments to entirely cover retirement
To reiterate, many people don’t actually want to stop working entirely. They just like having the option of it.
Many people identify their jobs as a source of purpose if it induces minimal stress while evoking genuine enjoyment.
Having access to options via financial freedom is liberating. You can sleep peacefully at night without worrying about working and earning money. You can choose to live however you want without financial constraints.
Achieving F.I.R.E. also doesn’t guarantee happiness.
A recent CNA commentary revealed that some individuals still “found no satisfaction in their accumulated wealth” and identified frugality as a double-edged sword. Yes, it helped them to pursue Lean F.I.R.E effectively, but it crippled their outlook and capacity to enjoy life.
All in all, F.I.R.E. is “a set of principles worth striving for, no matter the outcome”. It’s more akin to a mindset than a destination to reach; because not every decision needs to be financially driven.
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