FIRE basics for expats
Ever heard of the Financial Independence Retire Early movement?
The financial Independence Retire Early ( FIRE ) movement has been around for a while in western countries. This is something that I haven’t seen in general in Asia. Probably because of a lack of options in investing, because this movement is heavily dependent on investing aggressively. So this is something I had to learn from scratch. This article is a short introduction to FIRE basics for you to start with. I am not a financial advisor and none of the content in this post is financial advice. Always do your own research when deciding what you want to do with your money.
As the name suggests Financial Independence Retire Early movement suggests a lifestyle where you aggressively save and invest money to fund your early retirement. Sounds interesting right? Who doesn’t want to retire early?
The concept is simple enough for anyone to understand, but you already would have multiple questions popping up in your head. How do you know you have enough money saved/invested so you can retire? What happens if the money runs out?
This is where the 4% rule in Trinity Study comes in. Trinity Study is a paper from three professors from Trinity University. It has proved that you can comfortably withdraw 4% of your retirement pot ( of 60% stocks and 40% bonds ) each year, for at least 30 years before your retirement pot running out.
Using this as guidance you can now calculate how much of a retirement pot you want to retire early.
Your expected yearly expenditure at retirement = Your retirement pot x 0.04
Your retirement pot = Your expected yearly expenditure at retirement x 1/0.4
Your retirement pot = Your expected yearly expenditure at retirement x 25
Easy peasy right. So you only need to know your expected yearly expenditure at retirement and you can get the value of the retirement pot that you need to have before retiring.
But how would you know the expected yearly expenditure at retirement? Isn’t there inflation? For the FIRE calculations usually, the inflation is taken as 3%. You can also use online calculators to find out how much you will need in your expected year of retirement, to cover the expected yearly expenditure at retirement
So now you know how much you need your pot to be. The next thing is to figure out how much you need to save every month to get to your pot size. This is where the compound interest can do wonders. Compound interest simply means the interest on interest. For example, if you are getting a 7% return on investment yearly, when you save £100, you will get 107, next year the interest will apply to £107, and so on. You can use a simple compound interest calculator to get this.
If you do the calculation this way, you need to have a retirement year in mind first, then figure out the pot size, and then tweak your monthly savings to find out whether you will meet the pot size. I just laid out the calculation steps because to make it easier to understand what is happening in these calculations. But there are a lot of FIRE calculators out there, which you can define a monthly investment amount and get the early retirement age.
This is a relatively straightforward concept and calculations, right? Yes, but it does depend on a lot of assumptions, inflation rates being stable, your investment returning a stable return year over year. So if you want to try FIRE, have a serious think about these too.
The obvious next question is, are there actually people who have done this?
If you search over the internet, you can find many influencers, who have already reached their fire number and retired early or who are on the way to retiring early. I particularly liked the story of Christina and Amon who retired early and moved to Portugal.
Yes, if you are a true Asian, your obvious next thought would be, wait a minute I can save here and go back home and live a luxurious life in my retirement. Yes, you can, but also remember the reasons that made you leave your country in the first place. Some of them might be still there even after years.
