Financial Independence, Retire Early (FI/RE) is a movement dedicated to savings (sometimes extreme) and investment that allows its followers to achieve financial freedom and early retirement far earlier than traditional retirement plans.
Some proponents of the FIRE movement have retired as early as age 30, instead of the conventional and agreed upon retirement age of 65.
Steps to Achieving FIRE
In recent years, I’ve seen more and more Malaysians embracing the FIRE movement, especially the millennials.
Of course, many of us are still striving to achieve financial independence, myself included. My aim is to achieve this by the age of 35. Below are some of the steps I’ve taken.
There are no shortcuts here. My savings rate has always been high and well above the average Malaysians. In the first few years of being in the traditional workforce, I saved like hell. I detail how I built my investment portfolio through frugality hERE.
Asians in general are predisposed to saving from the onset. I think most families cultivate savings as a habit from a young age and that alone will set us apart from other cultures. Saving alone, I think, accounts for 50% of your FIRE journey.
Saving and your emergency fund goes hand in hand. The first step is always to build a fund for emergencies. Steps and how I structure my emergency fund can be found hERE.
An emergency fund helps in two major ways. Firstly, it gives you peace of mind. And secondly, if and when an unexpected financial crisis occurs, you won’t have to liquidate your investments to cover those costs.
Having set up my emergency fund, my next step was investments.
I’ve been fortunate enough to get out of my education debt early thanks to wonderful parents.
Another huge debt hurdle I foresee Malaysians encountering in their lifetime is of course your mortgage. Two ways to go about this, either factor in your mortgage repayments into your annual expenses, or if it is cheaper, rent. If you’re lucky to have your parents leaving and bequeathing you the family home after they’re gone, you’re set in this department as well. Just make sure to take care of them.
Other debts such as credit card and personal loans, stay clear of them. If you have them, pay them off at once, then start on your emergency fund.
2. Grow Your Money
There are a 101 ways to grow your money. The path I’ve chosen is to invest in stocks. You may find that you have superior knowledge in other assets like real estate. Or you may prefer to put your money in robo advisors like StashAway. To each his own I say. As long as you’re investing in something that is an asset.
By investing in stocks, my money will grow in two ways.
a) Capital Gains
A capital gain is when my stocks increase in value. For example, purchasing Nestle 2 years ago for RM70 per share. Today, that same share is worth RM140 per share, giving me a 100% or 2X in capital gain in two years.
The same can be said for real estate. Purchasing a residential property at RM100K 5 years ago, you may sell it for RM200K in today for the same 100% gain in five years.
b) Passive Income
A whole article can be written on passive income alone. Which is just what I did and you can read about it hERE.
To keep it simple here, passive income is income I receive without having to put in effort or work for. Through stock investment, I get passive income via dividends. As a real-life example, I received RM16,322.26 in dividend income last year from my Malaysian stock portfolio – the Freedom Fund.
Another example of passive income using real estate as an example is rental. The rent you receive from your tenants can be considered passive income as well.
Your FI/RE Amount
The amount everyone is aiming for to FIRE is actually different. It depends on your monthly expenses. If you’re able to live on RM1,000 a month, you can achieve financial independence and retire at a much earlier age with a much smaller amount in the bank.
How I Calculate My FI/RE Amount
As a general rule of thumb, you want to have 30X your yearly expenses in the bank, the dollar amount most people go by is RM1 million. For me, I’ve calculated my annual expenses to about RM36,000. And 30X that amount is RM1.08 million.
This of course is my own personal amount, no family as of yet. For those that are worried about inflation, I believe that a good investment portfolio will negate the effects of inflation.
Using mine as an example, investing in consumer stocks like Nestle and real estate like REITs, inflation is taken care of by these businesses themselves. Ie. Nestle will raise prices to keep up with inflation. And REITs like IGB REIT would definitely increase rental rates as the years go by.
If you however are just saving your money in FDs, you will have to account for inflation. So make sure your portfolio is invested in the right assets.
The First 100K
However, I’ve found it to be much easier to break down that RM1 million goal. Start with the smaller and (in my opinion) much harder to achieve goal of RM100K.
This is how I achieved my first RM100K.
After getting that RM100K, RM1 million becomes much, much easier. Snowballing from RM100K to a million is much easier than from zero to a 100K.
The Different Types of FI/RE
I know I know, they confuse the hell out of me as well.
So Fat FIRE is the best FIRE of all. You’re basically living it up post retirement and enjoying it to the fullest.
You’re able to survive without a job as your passive income more than covers ALL your expenses, not just your basic ones. It is of course the best way to retire, but also the hardest to achieve. You’ll have to be earning a lot as well as having a high savings rate.
But come post retirement, think extravagant getaways, a beautiful home, no more worrying about paying your bills.
This is the opposite of Fat FIRE where you basically cut your expenses as much as you can. If you’re prepared to lower your standard of living to the bare minimum post-retirement, Lean FIRE is for you.
People hop onto the Lean FIRE wagon when they realise that they aren’t able to save that much and/or time is running out. Also, if you prefer to spend your younger years enjoying and living a minimalist lifestyle after retirement, you may want to look into Lean FIRE.
Pros and cons here, if you’re absolutely all right with a minimal life, Lean FIRE is the way to go. You don’t need to save up as much for your retirement. It is a significantly lower amount. Also great if you don’t want kids.
This one here is pretty new to me. It is what’s between Fat and Lean FIRE. It basically means taking on a part-time job to supplement your income.
Thereafter, depending on how your investments do, you make a more informed decision moving forward. For example, if your stock investments do well over the next 3 years, and you’re able to achieve Fat FIRE, by all means, quit your part time job.
Protecting Your Money
What happens now that you’ve achieved 30X your yearly expense?
You’ll want to protect and continue to grow my money. Some proponents of FIRE actually stop growing their money at this stage. Instead, opting to make small withdrawals (typically 3%) a year.
Personally, with stocks, I aim to continue growing my portfolio from a million to much more. Retiring early isn’t a part of my plan.
Regardless, you will want to protect your wealth by diversifying your money into less risky assets now. At this stage, I would start moving my stocks and building a more defensive portfolio. I’ll focus on maintaining my dividend income as well as preserving my portfolio’s value. No more risky bets at this stage.
How Long Will the Money Last?
If you can get to 30 times your annual expenses, technically, that is enough for you to live off – forever.
With prudent management of your wealth at this point, trust me, you’ll be able to live off that portfolio for a long time. You may even have some leftover for the next generation.
FI/RE requires discipline and letting time work in your favor. Which is why starting early on your savings and investing is so important. Just keep at it and in no time, you’ll be living off your passive income.
If you’re interested in the concept of FI/RE and want to mingle and exchange ideas with like-minded people, we have a Facebook group hERE. To those that have already achieved FI/RE, please do join us and share your journey.