PETALING JAYA: Financial Independence and Retire Early (FIRE) -- a movement where young people save and invest aggressively so that they can stop working as early as in their 30s -- is not for everyone, financial experts warn.
Such a lifestyle is not for lavish spenders, and the accumulated passive income that funds an early retirement may not be enough due to our increasing lifespan.
Financial planner Rajen Devadason said FIRE is only possible for young adults who are willing to work extremely hard and keep spending to a minimum.
Individuals who embrace FIRE build up their retirement portfolio early, accumulating savings and investments which can generate various forms of passive income.
“Those who aim to attain FIRE may have to take on second or third jobs and have to try to live on between 25% and 33% of their take-home pay.
“All the rest of their earnings goes toward building a portfolio that they hope will provide a lifetime of passively generated cash flow, ” said Devadason, who is also CEO of a corporate mentoring consultancy.
He cautioned that those who adopt this philosophy of retiring early to live solely on investment returns and savings may find that their money may not be enough.
“The greatest risk people face today in retirement worldwide, is longevity risk; having our money run out long before we run out of breath!” he said.
Devadason believes that some of those who retired early could eventually be forced to go back to work after a decade or two of them willingly leaving the workforce.
“And because the world does not stand still for any of us, they may have to settle – in the 2030s to 2050s – for low paying, manual labour at a time when Artificial Intelligence powered robots and other devices will have rendered many such jobs obsolete, ” he said.
Financial planner Felix Neoh believes there is an implied level of frugality expected of FIRE retirees.
“If ‘keeping up with the Joneses’ is what you want, then FIRE is likely not suitable for you.
“If you can accumulate between 25 to 30 times of your annual expenses and are able to generate a consistent returns of about 4% per annum thereafter, there’s a good chance that your money will not run out, ” he said.
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Neoh said that not all FIRE is equal -- there is “lean FIRE” which is to accumulate 25 times a person’s annual income, and there is “fat FIRE”, which is double of lean FIRE.
“Life doesn’t stop after FIRE. You should continue to keep active either via paid work doing what you love or getting involved in a charity of your choice, ” said Neoh, who cautioned that inflation and other economic factors which are beyond a person’s control such as any weakening of the ringgit can affect a person’s journey.
There may also be other risks that people who embark on FIRE must consider.
“A safe withdrawal rate (about 4% based on a 50:50 portfolio split between bonds and equities) also implies a max 30-year retirement.
"Is this sufficient for early retirees, especially with extended life expectancy these days?“And what is your economic contribution to society if you retire early?, ” said Neoh, who suggested that a person who has attained FIRE should continue working for something they’re passionate about in order to mitigate risks.
“Delay drawing down on your accumulated assets so that your nest egg will last longer.
“The real question is, what’s driving you towards FIRE?
“If it’s due to your unhappiness about work or wanting more work-life balance, consider taking short breaks of between six to 12 months before retirement to recharge and re-skill yourself to better meet the needs of future employers and industries, ” Neoh said.
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