Latest retirement trend - FIRE

Are we playing with 'FIRE' when it comes to our retirement?

POSTED ON 5 JULY 2019

The Financial Independence, Retire Early (FIRE) movement has seen increasing popularity in recent years. Today, it is a widely discussed topic in the online community, especially among millenials and personal finance enthusiasts the world over. Here's what you should know about the latest trend in retirement planning.

Retirement planning is not often a common topic of conversation among the younger generation. However, the FIRE movement represents an unusual shift towards an interest in achieving a sustainable and early retirement.

What is FIRE?

In essence, FIRE is simply an accelerated version of retirement. The main goal of FIRE is to achieve financial independence at a significantly earlier stage, as compared to the traditional retirement age, thus enabling one to retire early.

One hallmark of this movement is to live frugally when one is young, so as to be able to save more, and then lead a low-maintenance lifestyle when one retires. As more people jump on the FIRE bandwagon, differences in retirement ideals and expectations have led to two main camps emerging - leanFIRE and fatFIRE.

leanFIRE sticks closely to the original FIRE movement, encouraging people to lead modest lifestyles by spending below their means while saving diligently and building multiple income streams. An offshoot of the leanFIRE camp, baristaFIRE is where people lead modest lifestyles but take on part-time work to supplement their income. This allows them to maintain employability, should they ever need to rejoin the workforce, plus gives them the flexibility to enjoy semi-retirement before being able to fully afford it.

In the other camp, fatFIRE is more for those who have been leading a comfortable enough lifestyle to accumulate the wealth they will need to maintain this way of living, even in retirement.

Achieving FIRE means starting your retirement planning early

The exact age to achieve FIRE can, and should, vary between individuals. This is because it largely depends on your financial background, how much you earn, and the amount you will need to sustain your desired lifestyle.

Regardless of which FIRE variation you want to pursue, you need to have a plan in place to achieve it. Taking yourself out of the workforce has its implications: 1) without prudent planning, you may not have the right skills to rejoin the workforce midway into your retirement; and 2) you will still need to generate sufficient monthly income for your living expenses, and this has to last substantially longer than the average retirement timeframe.

Here are some actionable plans that you can consider implementing, in order to achieve FIRE by your desired age.

Start your Retirement Planning Early

#1 BUILD AN EMERGENCY FUND

In the event of unforeseen circumstances such as job loss, medical emergency or unexpected big-ticket expenses, this amount is to cover the living expenses of you and your loved ones. Typically, you should have between 6 and 12 months of your average living expenses in a liquid savings or investment account.

Before achieving FIRE, aim to build an emergency fund that can sustain your lifestyle for an even longer period than usual. This is because you will face greater uncertainty in paying for numerous big-ticket expenses over the course of longer retirement years, or in being unable to top up your emergency funds once you have dipped into it.

#2 CONSIDER RETIREMENT PRODUCTS

In Singapore, CPF LIFE provides you with a monthly payout starting from age 65. If you plan to achieve FIRE, consider retirement products or annuities as a practical option to assure a guaranteed stream of income before you turn 65.

Should you decide to achieve FIRE by age 55, you can plan ahead and purchase the policy while still young in order to receive your first payout by the time you retire.

#3 TOP UP YOUR CPF RETIREMENT SUM

As your monthly payout from CPF LIFE depends on the amount you have in your CPF Retirement Account (RA) at age 65, one simple way to grow your retirement nest egg is to make voluntary contributions to your CPF Special Account (SA). Not only does this earn you an interest of at least 4% p.a., you will also enjoy a tax relief of up to $14,000 per year on top-ups to your own and your spouse's CPF SA.

The earlier you top up your CPF SA, the more time you will have to compound your balances. One thing you should note is that monthly payouts from CPF LIFE only start at age 65. Prior to this, you will need to depend on other sources of passive income to sustain your living expenses in early retirement.

#4 CONSIDER SAVINGS PRODUCTS

Savings products allow you to adopt a disciplined approach in saving up and earn potentially attractive returns for your future plans, while at the same time, provide a death benefit as financial security for your loved ones.

#5 TAP INTO THE VALUE OF YOUR HOME

Through the Lease Buyback Scheme, eligible HDB homeowners aged 65 and above can unlock the value of their flats to receive cash and higher monthly payouts from CPF LIFE. This is in return for the extra years of lease on your HDB flat that you are unlikely to need when you are older.

This national scheme can be considered another good alternative, should you need to supplement your retirement income during the later years of your FIRE journey.

Never too early to plan for your retirement

To avoid shortfalls in the income you need for your retirement, make sure to start planning as early as you can. This ensures you can be confident in achieving the retirement you want, whether it is FIRE, a variation of FIRE, or even a regular retirement at the conventional age.

Source: AIA Singapore Private Limited. Content adapted from this article.

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