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COMMENTARY: Early retirement may feel like a far-off dream for most people.

However, startup co-founder Shawn Low explains why there's much more to achieving financial independence than retiring early, and why some of the concepts of financial independence may be useful even if it isn't a feasible choice for you and your circumstances. 

Low has experience founding, building and advising technology start-ups. He had previously co-founded Better.com, a platform aimed at making homeownership more accessible for all, and is currently working on a new venture.

By Shawn Low

January is typically the busiest month of the year for recruiters. It’s when people have received their year-end bonuses, had lots of fun over the holidays with loved ones, and wonder why they put themselves through the grind for the other 11 months of the year.

“If only I could retire now and just have December all year round” is probably fairly high on the wishlist of many people in the workforce — so much so that there’s actually a whole lifestyle movement dedicated to helping people achieve that.

A whole lifestyle movement to help people retire now and enjoy life all day every day? Sounds like a scam… and too good to be true.

This is the Financial Independence and Retire Early (FIRE) movement, one that has gained popularity in recent years.

In the U.S., famous FIRE adherents like Peter Adeney (aka Mr Money Mustache) caught the attention of the media when he retired at 30 years old. In Singapore, Morten Strange retired at 33 years old and still managed to raise a family with four kids.

But there are arguably many other people who achieve “FI” early but don’t pull the trigger on “RE”. After all, if FI is about having options, why retire if you enjoy what you do?

Also, many regular retirees who retire in their 60s already commonly cite a loss of purpose and drive in their life. Imagine experiencing that issue at the age of 35.

Of course, to each their own. Who is to say what a well-lived life means to another person?

Financial Independence (even without the Retire Early part) is a concept that clearly appeals to many. Just on Reddit, there are over a million followers of the subreddit r/Financial_Independence and over 28K followers of the local version r/SingaporeFI.

Wow! That’s a lot of people. What does it even mean to be financially independent?

Simply put, someone is financially independent when they are able to pay their expenses for the rest of their life without working or being dependent on someone else.

Perhaps asking the obvious here, but what’s so great about being financially independent?

A good way to think about financial independence is in terms of having options. Achieving FI does not necessarily mean that your life has to change, or that it automatically makes you more or less happy.

If you enjoy your job and are happy with your life in general, being FI may not actually change your life that much at all.

But if people are unhappy with their jobs or bosses (which seems to describe many people in Singapore), then being FI allows you greater freedom to “just say no” and move on.

In a way, it allows you to take money out of the equation, and make decisions based on other things that matter to you.

Financial independence part does seem like a good option to have. But how is it even possible to achieve it?

There are many paths to achieve financial independence, so perhaps it’s most helpful to start with the broad overarching concept.

FI adherents typically build passive income streams that provide enough income to cover their expenses.

What’s passive income, and how is it different from regular income?

Income typically comes in two ways. There’s income from labour, which is the form of income we’re most familiar with. We go to work and our employers pay us a salary for that work.

And then there’s passive income. Passive income comes from the ownership of assets.

The oldest form of passive income is probably rent to a landlord. As the popular Netflix series “Bridgerton” makes abundantly clear, most of the aristocracy in the past didn’t really do much to deserve the rent. They just collected it because they happened to own the land through the birth lottery.

So I wasn’t born rich. Then what?

Fortunately, it is a lot easier to become an asset owner these days.

There are assets that you can buy using income you have made from your job. These can be stocks and bonds that produce returns for their owners, or they could be property that makes rental income. Nowadays, with modern financial products, anyone with 10 dollars to spare can become an asset owner.

Many FI adherents who work at regular jobs advocate for a very high savings rate (~50-80 per cent) early in their career. This has the advantage of allowing them to build up a big financial reserve of passive income assets while benefiting from the compounding of investment returns over a longer time period.

Take, for example, a 25-year old with no savings earning the median monthly income of their age group of ~S$3,500 or S$42,000 annually.

A 50 per cent savings rate would allow this person to become financially independent in 16 years at age 41 with an asset portfolio of slightly above half a million dollars. This assumes that the savings are invested in a diversified 80/20 stock and bond portfolio, using historical stock and bond average returns over the last 20 years.

People can also simulate their own models using financial independence calculators available online.

What if I cannot afford a high savings rate?

There are also assets that you can create with your own creativity and hustle. Social media has made it much easier for people to make content that reaches millions of viewers. These pieces of content are essentially assets that provide passive income for their creators.

This could include producing videos on YouTube, TikTok or Patreon. It could also be writing online content that generates affiliate referral or subscription fees.

Sounds really hard. I’m horrible in front of a camera and I can’t write to save my life.

Well, let’s be honest — if it was easy, everyone would be doing it already. While many fawn over how much successful influencers get paid, there’s a lot of effort that goes on behind the scenes to produce the nice, polished videos for 30 seconds of fame.

Also, keep in mind that not all assets are created equal. A fresh YouTube video will garner a lot of initial eyeballs and likes. One that is 3 years old? Less so. Content gets stale over time, and along with it, the size of the passive income stream from that asset.

So, is it even worth trying to become financially independent then?

The bottom line is, unless you’re inheriting wads of money, achieving financial independence is hard however you cut it. This isn’t some get-rich-quick scheme. The question to ask is whether the optionality that FI brings is worth the effort that you’re putting in to achieve it.

Are you willing to live on a fraction of your income for many years working at a high-paying job you absolutely hate? Or to take the risk of an initial income dip to convert a social media side hustle into a full-time career? Do you even enjoy being in the public view that much?

Beyond a certain point, the price of FI is no longer just financial. You are essentially making trade-offs with other aspects of your life today for the optionality that FI brings in the future.

So humour me - assume that I decide that FI makes sense for me. How much do I need to become FI?

It goes without saying that it depends on how much you spend. However, most FI adherents point to the concept of a safe withdrawal rate (SWR). Specifically, this is the amount of money you can reliably take out of your portfolio every year without risking running out of money.

How is that possible?

Basically, the big idea here is to put your financial reserves into a large, diversified portfolio of investments. While the portfolio may be volatile from year-to-year, the gains will even out the losses, and the net gain becomes what FI adherents use to fund their expenses.

In fact, if managed properly, the right safe withdrawal rate and asset allocation should enable one to live off that level of income in perpetuity.

So what is this safe withdrawal rate and why should I believe it?

There have been a few academic studies on what the right SWR is and most seem to converge in the range of 3-4 per cent with 3 per cent being conservative and 4 per cent being on the riskier side.

The most famous of these studies was the Trinity study which popularised the 4 per cent rule. The study looked back at annual withdrawals from a portfolio of stocks and bonds over 30-year periods between 1925 and 1995, and examined the number of scenarios in which the individual would have run out of money.

The study demonstrated that over the 70 years studied, a 4 per cent withdrawal rate over a 30-year retirement horizon with a 50-50 mix of stocks and bonds had a 100 per cent success rate (i.e, never ran out of money), even after accounting for inflation.

Since then, updated versions of the study from other independent sources (here and here) have generally leaned towards the more conservative end of 3 per cent, taking into consideration more modest stock market gains going forward and longer life expectancies.

To put it more concretely, this would mean that for every S$100,000 in your stock and bond portfolio, you could reliably withdraw roughly S$3,000 each year for the rest of your life and be unlikely to fully deplete the S$100,000 principal.

Anything else I should know?

One of the things people should watch out for in planning their own FI journey is that, unlike a straight-line financial projection, life is often unpredictable. Changes to our personal or family situation can happen at any time. Whether it’s the arrival of a new child, or the illness of a parent, these things are likely to significantly affect our expenses.

In addition, bigger life expenses also tend to be “lumpy”. A wedding, a house or a child all require some big upfront expenses even with the financing options available today.

It is not uncommon to hear stories of FIRE people having to “un-retire” because their expenditures grew as they entered a different phase in life.

Okay… that sounds scary, I really don’t know if I’m ready to commit to FI

But that’s the great thing. Anyone can benefit from some of these FI concepts even if they are not planning to become FI. The safe withdrawal rate could be a useful marker of how much additional income you can count on from your investment portfolio.

This could help with decisions like career exploration, taking time off to care for a loved one, or taking on a more meaningful but less well-paying job.

Makes sense. Everyone’s situation is a bit different, and it would be frankly weird if everyone is gunning for the same financial goals.

Exactly. Even within the FIRE community, there are many different flavours depending on people’s lifestyle expectations and circumstances.

For one, there are different levels of FIRE.

Some people choose to LeanFIRE, where they are willing to adopt a more frugal lifestyle in their retirement, in exchange for not having to accumulate as much of a financial reserve. Others prefer to FatFIRE which, as the name suggests, requires a large financial reserve but affords its adherents a rich stream of passive income each year.

There is even CoastFIRE, where adherents choose to accumulate a large financial base for their retirement early on and then take on much more leisurely (and lower-paying) jobs just to cover their daily expenses without having to save any more for their retirement.

I love these FIRE variants. They sound like different coffee brews at Starbucks.

In a way, they are. Different strokes for different folks. Few things in life are one-size-fits-all. And if finance is an enabler to life, then personal finance cannot be one-size-fits-all either.

It often takes more than just freedom and money to be happy. It might be fun to take a year (or even a few years) to travel the world and pursue some hobbies. But anything done to excess, like an all-you-can-eat buffet, doesn’t always seem as nice once you’re actually doing it.

Financial independence is a great option to have. But it’s not a free option. Whether it makes sense or not depends on what matters to you, weighing the sacrifices and costs involved to attain that option.

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Top photo adapted from Unsplash / Sreehari Devadas.