How the FIRE concept can help shape your mindset towards retirement planning

10 Sep 2018 

Have you heard of the term ‘FIRE’? 

FIRE is a recently coined acronym, short for Financial Independence and Retiring Early. As the name suggests, enthusiasts in FIRE community focus on ways to save up and invest enough to gain financial independence. Their main motivation for FIRE is to retire earlier and spend more time pursuing other interests.

The FIRE concept demands a total shift in the general mindset towards spending and saving. Instead of prioritising short-term goals earlier in life, it encourages you to set up and fulfil a financial plan that gives you enough passive income to retire at a desired age.

Sounds interesting? Read on as we go into detail below. 

What’s my current financial starting point?
A good starting point is to objectively assess your current saving and spending habits.

To get an accurate view of where you stand, try recording your daily expenses for 2-4 weeks (you can do this easily with a budgeting app). This will help you get a sense of how your daily expenditure actually adds up vs. how you think it adds up. 

It is also important to track how much you save each month. Depending on your stage of life, you might have additional expenditure in the form of debt – housing debt, student loan, and so on.  Your debts will impact the amount of money you are able to save, so you repay them promptly and set aside more savings once they are cleared.

Once you have done this, you’ll have a better idea of your financial status. We can now start looking at useful steps and tools to help you shape FIRE-friendly habits to reach your end goal of early retirement.

Take control over your spending habits
Spending less will allow you to save more – which then means more retirement savings for you to draw from.

People in the FIRE community have been known to save up to 40-75% of their monthly income! This may sound daunting if you are just starting out or new to this concept, but as a general guideline, you should try to consistently save at least 30% of your monthly income. You can slowly increase this amount every 2 to 3 months to build up your savings over time.

Let’s look at how you can gain better control over your spending, starting with your daily expenses. 

Ask yourself: Is there any way you can cut down on your spending, without drastically reducing your quality of life? A small difference each day adds up, so review your expenses carefully to see what little changes you can make. 

For instance, simply saving $4 each day (the difference between a $5.50 latte and a $1.50 kopi) adds up to $20 a week, assuming a 5-day work week. In a year, that’s $1,020 – enough for an overseas holiday, or a good sum to put towards your retirement savings.

It’s also important to budget for discretionary items that are more expensive, such as new electronic gadgets or an overseas trip. You can do this by setting aside a specified sum and making effort not to exceed this amount. 

This may require some sacrifice on your part (you may have to settle for a shorter holiday or a less fancy gadget, for example) but remember; this is one of the actions that will lead you towards financial independence and retiring early.

Use the right tools to build a solid retirement plan
Managing the amount you spend and accumulating your savings is just half the picture. The other half lies in how you manage your savings to build a strong retirement plan.

The first step to building a retirement plan is to estimate how much you’ll need in order to retire. 

A good estimate is to have a monthly retirement income of 70% of your last-drawn salary, and have it last for 20 years. 

The CPF retirement estimator can then help you calculate how much you need to set aside based on your desired monthly income and estimated retirement duration. 

Another tool that can help you reach your goals is compound interest, which helps you earn “interest on interest” to grow your savings exponentially over time. This means that the earlier you start, the more your savings will grow. 

The diagram below illustrates the power of compound interest. In this scenario, saving for your retirement earlier yields larger returns due to the difference in time period. As you can see, saving a smaller amount of $100 each month can yield a larger total compounded amount after 20 years, as compared to saving $200 per month over 10 years.  

How the FIRE concept can help shape your mindset towards retirement planning

Putting this into context, CPF savings grow with compound interest, and one of the ways to boost your savings is to save more in your CPF accounts.

Under the Retirement Sum Topping-Up Scheme (RSTU), you can top up your Special Account (SA) (if you are under age 55) up to the current Full Retirement Sum (FRS), or Retirement Account (RA) (if you are 55 and above) up to the current Enhanced Retirement Sum (ERS). Top-ups can be made with cash or via a CPF transfer. If you are below age 55, you can  transfer your Ordinary Account (OA) savings to your SA to earn higher interest. If you are 55 years old and above, a transfer can be done from your SA and/or OA* to your RA to earn interest at up to 6% p.a.**

Again, the most important tip we can give you here is that the earlier you start, the more time you will have to grow your savings. You can also consider looking into other types of investments, but bear in mind that you must take into consideration the risks involved.

*For transfer to own RA, SA savings will be transferred first, followed by OA savings.
**Including an extra 1% interest paid on the first $60,000 of a member’s combined balances, with up to $20,000 from you OA. Members aged 55 and above will also receive an additional 1% extra interest on the first $30,000 of their combined balances, with up to $20,000 from your OA.

Read Also: SSB — A Great Investment that No One Knows About
Read Also: 2 Ways to Step Up Your CPF Strategy

Building a strong retirement at any age
What if you’re already nearing retirement – is it too late to benefit from compound interest?

Not at all. You can still make smart financial decisions to maximise your retirement savings.

Based on the diagram, assuming you have 30k in your RA, you’ll earn $1,800 interest after one year. But if you have more saved up – for example $80,000 – your interest shoots up to $4,100. 

How the FIRE concept can help shape your mindset towards retirement planning

​In short, with interest of up to 6% p.a., you can earn a good amount of interest on your RA savings every year.  Let’s say you are 55 in 2018, and you have $60,000 in your RA. In 10 years, this amount will grow to become about $97,200 and you would have earned about $37,200 of interest! The lesson here is that even if you are aged 55 or older, it’s not too late to leverage on compound interest to maximise your retirement income.

When you turn 55, your RA will be created for you. The savings from your SA and/or OA up to your FRS will be transferred to your RA to form your retirement sum. The retirement sum will provide you with a monthly payout from the payout eligibility age, which is 65 for members born in or after 1954.  

Under CPF LIFE, you can get lifelong monthly payouts based on the amount of savings you set aside in your RA. There are three CPF LIFE Plans to choose from – the LIFE Standard Plan, the LIFE Basic Plan and the LIFE Escalating Plan. You can choose a LIFE Plan that is most suitable for your retirement needs, depending on whether you want levelled payouts or increasing payouts, and whether you want more payouts for yourself or leave more for your loved ones.​

How the FIRE concept can help shape your mindset towards retirement planning

The following diagram gives you an indication of how much you will receive in CPF LIFE payouts based on  the LIFE Standard Plan and different retirement sums in 2018. 

You can also use the CPF LIFE Payout Estimator  to estimate how much CPF LIFE monthly payout you can get under the various plan types, based the amount of savings you set aside in your RA.

How the FIRE concept can help shape your mindset towards retirement planning

Read Also: How Much Will I Receive in Monthly CPF LIFE Payouts?

It’s your turn to apply the FIRE concept to your own financial planning

We’ve given you several basic tips to help you understand how to get started utilising the FIRE concept for your own retirement planning.

If you’re new to the concept and still have time on your side with retirement several decades away, now’s the best time to start.

However, if you’re already nearing retirement, fret not – you can still utilise these tips to build on your retirement savings. Whatever the case, it’s good to have a bright attitude towards your finances and to plan for success!

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