How to Get Financial Independence and Retire Early (FIRE) In Singapore

How to get financial independence and retire early (FIRE) in Singapore

The FIRE movement has risen in popularity over the years. Fed up with high-pressure jobs, long hours and still being left with barely enough at the end of the day, some people are quitting their jobs and embracing the FIRE movement.

Read also: 9 Part Time Jobs You Can Do From Home in Singapore

What is FIRE?

FIRE stands for Financial Independence, Retire Early.

The goal of FIRE is to achieve financial independence earlier than the retirement age, which is 62 years in Singapore. By financial independence, we mean having enough passive income to cover your living expenses without having to be employed or dependent on others.

Followers of the FIRE movement live frugally so they can save more when they’re young. These extra savings then go into investment accounts, where the magic of compounding does the rest of the work.

Some people practice “lean FIRE” (a lifestyle of extreme frugality) while others embrace “fat FIRE” (a more extravagant standard of living). Still others practice “barista FIRE” (typically by working part-time where there are company benefits to lean on, like at Starbucks).

How Do You Achieve FIRE?

Much of the conversation on FIRE revolves around hacking your finances by increasing your savings rate, travelling cheap, saving on daily purchases and more.

Generally, the formula for FIRE is to save aggressively and invest passively. FIRE followers maximise their savings rate by finding ways to increase their income or reduce their expenses. The goal is to accumulate wealth-generating assets until your passive income provides enough money for living expenses.

When FIRE followers reach financial independence, a job or paid work becomes an optional part of life, allowing you to retire from work much earlier than the standard retirement age. For most Singaporeans, that ideal retirement age is between 40 to 50 years old.

But how do you even get started? The next section will cover actionable steps.

8 Practical Steps Toward Financial Independence

1. Calculate Your Retirement Needs

Based on your current monthly expenses, you can extrapolate how much you’ll need for financial independence using the 4% withdrawal rule.

The 4% rule states that you can safely withdraw up to 4% from your investment account every year because the average market returns will replenish what you took out. Using that guideline, you can live off your investments without ever running out of money. 

So let’s say you currently spend about $2,000 a month, or $24,000 a year. To get that amount from your investments, you’d need an asset portfolio of at least $600,000.

You can also use tools such as CPF’s retirement calculator for this step, though you’ll still need to have an idea of how much you spend.

2. Grow Your Savings Rate

The biggest determiner of how quickly you’ll reach financial independence isn’t how much you save — it’s your savings rate.

What’s the difference?

Let’s imagine you earn $60,000 per year and spend about $42,000. That leaves you $18,000 in savings per year, or a savings rate of 30%.

After doing up your calculations, you realise you need $1,050,000 to retire on a safe 4% withdrawal rate. You already invest your savings and have a decent portfolio, so you’re on track to hitting financial independence in about 14 years.

One day, your boss tells you that you’ve been promoted. Hurray! The promotion also comes with a pay raise, so you now earn $72,000 a year. The extra income means you think you can splurge, so you maintain your $18,000 in savings per year and spend the surplus.

The problem? Thanks to the lifestyle inflation, you now spend $54,000 a year. Achieving financial independence means you need $1,350,000 to maintain the same lifestyle. That will take you four more years, moving the financial independence goalpost to 18 years total.

If you had kept your expenses at $42,000 and grown your savings rate instead, you’d have been able to shave off two years from that original timeline.

Read also: 5 Best High-Interest Savings Accounts for Singapore (2022)

3. Set Aside an Emergency Fund

As a rule of thumb, we’d recommend setting aside six months’ worth of expenses even before you start investing. That gives you a buffer in case of unforeseen circumstances like a job loss, medical emergency, or unexpected big ticket expenses.

Some even go further and put away six to 12 months of income, but we wouldn’t recommend this. In Singapore, bank interest rates for savings accounts are dismal — meaning your money would hardly be doing any work for you. If you’d still prefer a bigger buffer, it’s better to plop your cash into a more liquid investment vehicle.

4. Remove Debt

At the heart of the FIRE movement is growing your savings and having minimal to no debt. So start the ball rolling by paying off any debts you may have. If you have multiple debts, think about whether you want to pay off the one with the lowest balance first for a quick win, or tackle the account with the highest interest rate.

Home loans might be the sole exception here. The annual interest rate for a mortgage is around 2%. In contrast, a dividend-yielding stock (like REITs) might give you 5 – 8% per year. That means putting your spare cash into dividend stocks would generate enough income to pay off your home loan interest and still leave you with extra.

5. Budget…After Understanding What Brings You Satisfaction

Budgeting doesn’t sound fun to most people for one good reason: it’s inherently restrictive. Like a crash diet that eliminates whole food groups, anything that feels limiting is hard to sustain in the long run.

We’d prefer a different method: tracking your expenses for a month or two while spending as you usually would. This gives you a good sense of where your money is going, which then allows you to break down and better analyze the spending categories by what brings you satisfaction.

For example, I used to spend $6 every day on a latte, which added up to roughly $180 a month. But it wasn’t so much the coffee I enjoyed — it was the time I spent chatting with my co-workers during our breaks.

I realised I could get the same enjoyment even if I made my own coffee, so I started buying coffee beans and brought my grinder and Aeropress to work. That one change saved me $160 a month.

6. Choose Quality Over Quantity

While it might be tempting to scrimp and save every cent, you can stretch every dollar further by focusing on quality over quantity. For example, buying a slightly more expensive refrigerator that will last 15 years is better than getting a cheap one that breaks down after five years.

7. Invest

Investing is the best way to make your money work for you so you don’t have to work for money. This doesn’t mean just buying stocks, though — you could also invest in other assets like bonds, gold, property, or even cryptocurrency if you have the risk appetite for it.

Besides applying for a brokerage account, consider opening a Supplementary Retirement Scheme (SRS) account with a bank of your choice. This gives you tax relief for every dollar you put into the account along with the ability to invest SRS funds.

The one caveat is that you’ll have to wait until the statutory retirement age to withdraw your funds with tax concessions — and the retirement age moves up every so often.

Retirement products from insurers can also provide a stream of income even before you turn 65, depending on the starting payout ages of each policy.

But before you look to invest, factor these incoming Central Provident Fund (CPF) payouts into your planning:

CPF Retirement Account: At age 55, Singaporeans and Permanent Residents will be able to withdraw your savings from your CPF, provided you’ve set aside your Full Retirement Sum in your CPF Retirement Account.

CPF LIFE: In Singapore, CPF LIFE is an annuity scheme that provides you with a lifelong monthly payout starting from age 65. The amount is between $500 to over $2,000, depending on the amount you’ve saved in your Retirement account. That’s a pretty sweet deal, in our opinion.

Top-up CPF Retirement Sum: CPF combines savings from your Special Account and Ordinary Account to form your Retirement Account when you turn 55. One way to build up your nest egg now is to make voluntary contributions to your CPF Special Account. This way, you can earn interest of at least 4% per annum, not to mention the tax relief of up to $14,000 per year (on your own and your spouse’s account).

HDB Lease Buyback Scheme: Under this national scheme, homeowners can unlock the value of their flats and receive a stream of income in their retirement years even as they continue living in it.

Basically, you sell a part of your flat’s lease (while retaining the length of lease based on the age of the youngest owner) in exchange for more payouts. The proceeds will be used to top up your CPF Retirement Account. You can then use this to join CPF LIFE.

Read also: 5 Investment Tips for Beginners in Singapore

8. Don’t Quit Your Day Job (Yet)

As tempting as it is, don’t quit yet. FIRE requires you to maximise your income while minimising costs. Some people may quit because they can’t stand their day jobs. If that’s the case, you can consider alternative employment through part-time, freelance, or contract work for some flexibility.

With these basic tips, you can get started on your road to financial independence. Each approach may be better suited for some more than others. So take some time to consider whether each tip suits your personal circumstances, risk appetite and goals.

Read also: A Guide to Part-Time Jobs for Students 16 Years and Above