FIRE Up Our Personal Finance Journey. Just Do Not Forget Property.

FIRE Up Our Personal Finance Journey. Just Do Not Forget Property.

FIRE. No, I am not talking about something burning down. In personal finance, FIRE stands for Financial Independence, Retire Early. Google for it to find millions or article to read if not more. However, if you are already 35 years or older and is nowhere near retirement, then maybe it will be hard to achieve FIRE status even if you start now.

FIRE is a popular concept that encourages us to take control of our money, build wealth and potentially retire much earlier than the traditional retirement age. But what does FIRE really mean? Does it mean we must save every sen, stop buying things we enjoy and retire at 40?

Not necessarily. Let’s look at it more closely.

#1 What exactly is FIRE?

Financial Independence means having sufficient financial resources to support our living expenses without depending entirely on a salary.

Retire Early means having the option to stop working full-time earlier than the conventional retirement age. It could be 60 in Malaysia. It could be 69 in Singapore. It could be as long as you like to work in Australia. Of course, even in Malaysia there is a proposal to extend the retirement age to 65… Some consultants are saying so.

Notice the word option. FIRE is not necessarily about quitting our jobs as soon as possible. It is about having enough financial freedom to decide whether we want to continue working, change careers, run a business, or spend more time doing things we love.

Financial independence and being debt-free are also two different things. We can have no debts but still have insufficient savings to support ourselves. On the other hand, someone may have a housing loan but also have sufficient investments and income to manage it comfortably.

The important question is this: If our salary stops tomorrow, can our money and other income sources continue supporting our lifestyle?

That is the financial independence we should work towards.

#2 How do we achieve FIRE?

There are three important steps.

First, spend less than we earn. This sounds simple, but it is the foundation of personal finance. We do not necessarily need to buy the cheapest phone, cancel every subscription or stop enjoying our favourite food. We need to ensure our expenses remain below our income.

Second, save and invest consistently. Savings give us a financial buffer, while investments can help our wealth grow over time. Depending on our circumstances, investments may include EPF, shares, unit trusts, bonds and property.

Third, build income that does not depend entirely on our time. If every ringgit we earn requires us to work another hour, our income will usually stop when we stop working. Investments that generate income can help reduce this dependence on employment.

A popular FIRE calculation is the 25-times rule. We estimate our annual expenses and multiply them by 25 to get a rough retirement investment target.

For example, if we need RM4,000 a month, our annual expenses are RM48,000. Multiplying RM48,000 by 25 gives us RM1.2 million.

Does this mean RM1.2 million guarantees a comfortable retirement? No. The calculation is only a starting point, commonly associated with withdrawing around 4% of an investment portfolio in the first year. Inflation, investment returns, taxes, healthcare costs and the length of retirement all matter. Someone retiring at 40 may need their money to last much longer than someone retiring at 60.

For a useful explanation of the concept and its limitations, see Vanguard’s guide to FIRE and the 4% rule.

#3 FIRE has evolved. It is not one-size-fits-all.

The FIRE movement has developed different approaches to suit different lifestyles.

• Lean FIRE: Aim for financial independence with a relatively modest lifestyle and lower expenses.
• Fat FIRE: Build enough wealth to support a more comfortable or higher-spending lifestyle.
• Coast FIRE: Accumulate enough investments early so that, in theory, they can grow towards a future retirement target without requiring the same level of additional contributions. We still need to earn enough to cover current expenses.
• Barista FIRE: Accumulate enough investments to cover part of our expenses, then use part-time work or other flexible income to cover the balance.

These variations show that FIRE is not simply about working extremely hard, saving every sen and retiring as early as possible. It can also mean gaining more choices over how we work and live.

A recent Charles Schwab explanation of the FIRE movement discusses how the approach centres on building enough wealth to make work optional, while recognising that the right target depends on our spending, inflation and investment performance.

For Malaysians, we also need to consider how our EPF savings fit into the plan and when we can access them. Money intended for later retirement may not be available to fund an early retirement in our 40s or 50s.

#4 But please, do not forget property!

Here comes the part that personal finance discussions sometimes overlook.

We can reduce our expenses by buying a cheaper phone, changing to a more affordable broadband plan or cutting unnecessary subscriptions. These are sensible decisions. However, housing is usually a much larger expense.

Let’s use a simple example. If we continue renting a room for RM500 per month, we will pay RM6,000 a year. Over 25 years, that becomes RM150,000, assuming the rent never increases. That’s just a room and I do wonder if there are that many people who will prefer to just live in a small room for a very long time.

Now imagine renting an entire home. The long-term amount could be considerably higher.

Of course, owning property is not free. We need to consider the deposit, loan repayments, maintenance, repairs, insurance, taxes and other costs. Property prices can also fall, and not every property makes a good investment.

But if we buy a suitable home that we can comfortably afford, we may eventually clear the housing loan and reduce one of our biggest retirement expenses. Alternatively, a carefully selected investment property may generate rental income to help fund our living costs. Both strategies require proper planning, and neither is guaranteed to work.

The key is to consider housing as part of our retirement strategy, rather than assuming we can simply rent forever without affecting our financial independence.

#5 FIRE should give us freedom, not just an early retirement date.

Personally, I believe financial planning is about building a life we want, rather than merely chasing a number.

If we enjoy our work, why must we stop working just because we have reached a certain age? Perhaps we could teach, volunteer, start a small business or pursue something meaningful without worrying about the salary.

My own wish would be to lecture at a university somewhere in Malaysia, teach a subject I love, and donate the salary to a charity of my choice, subject to my schedule. That would be a meaningful use of financial independence. No, I am not at that level as yet. We shall see.

But we must stay realistic. We need enough resources to support ourselves for as long as we live, not merely enough to celebrate our first day of retirement.

FIRE can help us retire earlier, but property investment can help ensure we stay retired. If we do not plan for housing, who will keep paying the rental year after year?

Happy planning, yeah!

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Sources

1. Original article: FIRE Up our personal finance journey. Just do not forget property.
2. Charles Schwab — What Is the FIRE Movement?
3. Vanguard — Early Retirement and the 4% Rule
4. The Motley Fool — FAT FIRE vs. Coast FIRE vs. Barista FIRE