The Ultimate Beginner’s Guide to Financial Independence and Early Retirement

The Ultimate Beginner's Guide to Financial Independence and Retiring Early - Counting Every DollarWhat does your weekday routine look like? You wake up, get ready to go to work. You commute to work and a couple of hours after you woke up, you finally start work. You then work 7 – 12 hours, and endure another commute back home. The sun is setting already. In the depths of winter, you may not even see the sun except through a window.

You do this 5 days a week, almost all the year. For many years, for a few decades until you retire at 67 or whatever your country’s retirement age is. Most people die shortly afterwards.

Society has conditioned us to think that all of the above is normal. So much so that most of us never even question it. Why should you spend the prime of your life working on something that is not your life’s purpose? At the ripe old age of 30, it is this question that led me to discovering Financial Independence & Retiring Early (FIRE).

Many people do not find their jobs meaningful – over half of us if surveys are to be believed. Its just a means to an end – sustenance, enjoying life’s pleasures, or providing for their families. So why do something all your life if you don’t care about it in the first place?

Most of us think we are invincible when we are young, but 1 in 4 of us will be unable to work due to disability before retirement age.

Another threat looming on the horizon is machines taking away almost half of today’s jobs in a not too distant future.

So its clear that you and I better start preparing for a time when we either don’t want to work, can’t work or do not even have the luxury of work.

At its core, FIRE is about taking back control of the most precious resource we have – time. Instead of spending the better part of your life in a cubicle until you retire a few years before you die, FIRE will let you quit work to do whatever you heart pleases. Becoming financially independent in your 30s, 40s or even 50s and then doing whatever you want to is far better than being tied to your desk until your late 60s, 70s or even later!

The good news is that if you have the motivation and desire to think outside the box, you can live your life the way you want well before your government tells you when to retire! All it takes is a willingness to shun mindless consumerism, save well and invest wisely.

In this post, we will share how to save and invest wisely to achieve Financial Independence and Early Retirement.

At its core, FIRE is about taking back control of the most precious resource we have - time. Click To Tweet
Note: None of the content on this website is financial advice, and I am not a financial advisor. Please see the disclaimer for more information.

Whom is this guide for?

We are an Indian-European international family currently living and working as expats in Singapore. We have tried to make it relevant to anybody regardless of where you are from, you will just need to research the equivalent investing options in your country of residence. That said, this article is geared towards Europeans and Indians.

Now if you know next to nothing about personal finance or FIRE, this guide is for you.

If you are pretty clued up about personal finance and investing, but are new to FIRE, this guide should still help you.

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The Basics of FIRE

Let’s get a few frequently asked questions out of the way first:

What is Financial Independence (FI)?

Financial Independence is when you do not need to work for money anymore.

The most common way to become financially independent is by first working a conventional 9-5 job, saving aggressively and prudently investing those savings in appreciating assets over a number of years.

How does Financial Independence lead to Early Retirement (ER or RE)?

When you are ready to stop working for money, the appreciation in value of your assets can then be tapped into to support your lifestyle until you die. If you withdraw a small enough amount per year, you can ensure you do not run out of money for a very long time. In some cases you can avoid touching your ‘principal’, and in some cases your assets might keep growing even though you are withdrawing from it.

In other words, the income/interest that you get from your investments – mutual funds, bond funds, real estate, property rentals, etc is enough to cover your living expenses without the need to work.

You cannot retire early unless you are first financially independent.

Do I have to retire early after becoming financially independent?

No! Many people continue to work after becoming FI because they are not ready to retire. In this case, your assets will keep growing and compounding until you decide to draw down from them.

You can choose to continue working your current job, or switch gears to a less lucrative but more meaningful job.

Do I need a 6-figure income to FIRE?

No! Anybody with an above average income can and should aim for Financial Independence. Of course a high income will shorten the journey to FI and RE.

Anybody with an above average income can and should aim for Financial Independence. Click To Tweet

How much do I need to save to retire early?

Great question and we will cover that below.

How to retire early with no money?

You might think this is a silly question, but it’s a surprisingly common query according to Google. The short answer is you can’t. We do not condone gambling nor do we agree with playing the lottery. So we are not going to offer any shortcuts, sorry.

Ultimate Beginner's Guide to Financial Independence and Retiring Early - Pinterest - Counting Every Dollar

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Step 1: Decide by when you want to become financially independent

The decision to pursue financial independence is one that will force you to take stock of your life so far and think of the future. You absolutely should take the time to think about your life goals, together with your spouse if you’re married. This is the first and most important step.

Typically most people have a few major saving goals:

  • Further education for oneself such as a Master’s degree
  • Own marriage – doesn’t apply to some Indians – thanks to the parents!
  • Children’s educational expenses
  • Children’s marriage expenses – probably applies only to Indians!
  • Healthcare

Especially for those in their 20s, retirement is NOT usually on the list of life goals. But if you want to FIRE, you need to start early! The massive advantages of saving and investing early in life cannot be emphasized enough – see for yourself!

So back to the question – when do you want to become financially independent? The answer depends on:

  • Do you want to be FI and not RE? Some people are happy to work until traditional retirement age – thats fine. But you can still aim to become FI much earlier. Why? Because being FI gives you options. Don’t like your boss or your job? Quit and look for another one at your leisure. Can’t do that if you need the next paycheck to survive.
  • Do you want to shift gears and go part-time instead of RE? This is a very popular option among FIRE aspirants and its easy to see why.
  • Do you have a pension that kicks in after a certain number of years’ service or at a specific age? You may want to stick around at your company until then.
  • Do you have kids? Do you have specific plans for their schooling?
  • Will your spouse continue to work after you RE?
  • Do you have any side hustles, that you would like to continue after FIRE?

For the CED family, the answer to when FI is by the time our eldest child starts going to school. So our entire FIRE plan is geared towards ensuring we can pull the plug on our 9-5s by that point in time.

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Step 2: Decide how much income you need to be FI & what your FIRE targets are

If you go by traditional retirement advice from retirement advisors, you will hear stuff like you will need 70% of your pre-retirement income to cover expenses in retirement. Why? We think this is useless especially if your savings rate right now is more than 30%!

In the FIRE world, we look to optimise both our income and our expenses. Think about it – why should your current income have any bearing on your post RE expenses? There’s no tangible link between the two. So our RE expenses are not automatically going to be a % of our current income.

So we need to flip the script and get a grip on actually how much income you need to be FI. Do not assume it will be the same as your current expenses. Chances are, it will be vastly lower. Simply because you won’t have all the work-related expenses such as commuting, clothes, lunches, drinks etc.

Now let’s define a few terms. Your net worth is all your assets minus all your liabilities. This includes your residence as well.

But if you are going to live in your residence after FIRE, then its not going to generate any income for you. But it does reduce your expenses because you don’t have to pay rent.

Your FI target is the target invested amount (‘corpus’ for my Indian friends) that you need to cover your essential living costs. The definition of essential is up to you. For some people, holidays are not essential. For some people pets are essential. FI is personal to you and your family. So you need to define what your essential expenses will be after FI.

In any case, do not include the equity you have in your residence in your target invested amount calculation, because then you will be double counting it – remember your expenses are already lower because you are going to live rent-free!

Your RE target is the target invested amount or corpus you need to comfortably retire. This means your invested assets will throw off enough income to cover your ideal RE lifestyle.

For some people, the FI and RE target is the same. For some people, there is a buffer between the two that includes an annual fancy holiday, a sports car, anything that is a luxury but not a necessity. You decide what’s best for you.

Ready to calculate your FI and RE target? Let’s say you have decided that you need $30,000 per year in today’s money to cover your essential living costs. Now we need to find out how much your FI target (invested assets) need to be so that you can withdraw $30k per year.

The best way to think about this is to visualise the $30k as a percentage of your invested assets. Since we already know your FI expenses, all we need is a % figure – this is called the withdrawal rate.

Let’s assume a conservative 3% safe withdrawal rate per year in retirement. A withdrawal rate is safe only if it will ensure you will not run out of money before you die, with a good level of certainty (95% confidence statistically).

You may have heard of the 4% ‘rule’ or 4% safe withdrawal rate, which came out of the famous Trinity study conducted in the US based on US equities and US bond returns. We do not believe an international investor should use 4%. To be conservative in our calculations, we suggest 3% instead.

So then the target invested amount to sustain a $30,000 withdrawal is 30,000/3% = $1,000,000 which is your FI target. This is also 33 times your planned annual expenses (because 1/0.03 = approximately 33).

Side note: the 4% rule results in 25x annual expenses, which is a common rule of thumb used by American FIRE enthusiasts, again coming out of the Trinity study.

If you want an additional $10k per year for RE, your RE target becomes 40,000/3% = $1.3 million.

For the CED family, we have an FI target and a slightly higher RE target. The difference between the two is a nice paid-off family home in our target FIRE destination.

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Step 3: Save a high % of your income

Now that you have decided your FIRE target (i.e. $1.3 million), you have to think how to get there. And unless you have lucked out winning the lottery or bagging a huge inheritance, the only way to achieve it is by consistently saving and investing a portion of your income.

Here’s how much people from all around the world save:

Ultimate Expat Guide to FIRE - Household Savings Rate by Country - CountingEveryDollar

Source: OECD, IMF, National Statistics Agencies

While the average savings rate of China and India are pretty good (at least on paper), it’s safe to say that most of the world is not super good at saving.

So the question is how much savings is high enough? Let’s define a new term – savings rate.

The Bureau of Economic Analysis defines savings rate as (disposable personal income minus personal outlay) divided by disposable personal income.

That’s another way of saying: Savings Rate = Savings/Net Income, where

Savings is (Net Income – Spending)

Net Income is your take-home pay, i.e. (Gross Salary – Tax)

If you make retirement contributions, technically that counts under savings, but for simplicity’s sake let’s ignore it for now.

Now assuming you are 30 years old and you are going to start your FIRE journey from scratch. How much do you need to save per month to hit a FIRE target of $1.3 million at age 45?

To keep things simple, we will always talk in terms of today’s dollars (or substitute your currency). We do this by using figures based on today’s value and a real rate of return in all our calculations. This makes it easy to relate to our FIRE target numbers. So the $1.3 million target is in terms of today’s money. When you actually get to age 45, thanks to the nominal rate of return, your FIRE stash would be a lot larger than that but only worth $1.3 million of today’s money.

Now if you assume a real rate of return of 0%, i.e. your savings just keep pace with inflation, you need to save $86,667 per year. But this is where the magic of compound interest comes in. If you manage to get a positive real rate of return on your investments, you need to save a lot less than $86,667 per year.

How much less? Let’s find out and we bet you are going to love how much less you need to save!

Using this FI calculator, you can see that a 5% average real return on your savings (instead of 0%) can reduce the required savings per year to drop from $86k to $60k. A net reduction of 26k in the savings target per year!

Ultimate Expat Guide to FIRE - Savings required to FI at 5pc returns - CountingEveryDollar

Credits: Engaging-Data.com

For simplicity we assume that current expenses and FI expenses are the same ($40k), and a 100% stock portfolio. So if your income now is $100k and you spend $40k, the required savings rate is 60%. Keep reading even if your income is well below $100k – it doesn’t matter much as we shall see soon.

Wait a minute, we hear you say, why only 5% real return? Since stock market valuations are on the higher side right now, we suggest it is safer to assume 5% instead of the historical 7% that most FIRE enthusiasts assume. Also if you are an international investor (non-US), this is a more sensible figure.

Still, what if you somehow manage a real rate of return of 7% on average? Then the required savings rate drops to $50k per year from age 30 to 45. That’s a savings rate of 50%.

Ultimate Expat Guide to FIRE - Savings required to FI at 7pc returns - CountingEveryDollar

Credits: Engaging-Data.com

Summary of the discussion so far: If you start at 30 years of age, with no savings at all, and save 60% of your net income for the next 15 years, you will become financially independent and can retire early at age 45.

The exercise and tool we mentioned above will give you a savings rate target to shoot for. Practically you need to find a savings rate that balances your enjoyment of life vs. saving enough to FIRE by your target FIRE age. 50% is a nice number to aim for in any case.

Our target is 75% and we regularly exceed this as reported in our monthly income reports.

Now another interesting tidbit is keeping all other factors constant, if your current expenses = retirement expenses as in the example we used, your time to FIRE depends only on your savings rate!

This was first popularised by the most visible proponent of FIRE, Mr. Money Mustache.

Here’s a table that summarises this for a real rate of return of 5%, withdrawal rate of 3%:

Savings RateYears to FIRE
5%71
10%57
15%48
20%42
25%37
30%32
35%29
40%26
45%23
50%20
60%15
70%11
80%7
90%3.5
95%1.7

Okay, what if you don’t make a $100k, but $60k. No worries, your FIRE timeline depends only on your savings rate. Can you live on $24k, and save 60% – that is $36K? Do this for 15 years, and you can FIRE and spend $24k per year for the rest of your life.

FIRE is not just for the 6 figure income people, but for anybody who has an above average income.

The table also illustrates the fact that saving 30-40% of your income is a good idea even if you do not want to retire early. This will give you a comfortable financial cushion and make you less reliant on social security or your country’s welfare system when you do finally officially retire.

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Step 4: Create your investment strategy

Before we get into the nitty-gritties, let’s understand the basics.

Why should you invest your savings? Why not save by sticking it in a savings account or fixed deposit with your favourite bank? Why bother with ‘investing’?

Because of inflation. If the rate of return from your chosen savings account does not exceed the rate of inflation you experience in your country, your money is shrinking in real terms.

In other words, the ‘headline’ rate of interest that banks quote on their savings account is the nominal rate of return, that is before inflation is taken into account. What you should aim for is a significant ‘real’ rate of return after inflation has chewed through your interest.

Let’s look at an example. Your ‘high interest’ savings account gives you 2% interest annually (nominal rate of return) and you save your money there for a year. But your country’s inflation rate was also 2% that year. So your real rate of return is 2% – 2% = 0%. So the value of your money after a year is exactly the same as it was at the beginning of the year. Not great, but could be worse.

Worse? How? Let’s say your interest rate was 0.1% and inflation was 1% that year. So the real rate of return was negative. Meaning your money actually shrank because it can buy less goods at the end of the year compared to the beginning of the year.

So the important principle to grasp is always plan with the real rate of return, not the nominal rate of return.

Is there any point in having a bank savings account then? Yes! As we will see in the next section, your emergency fund should live in your bank savings account.

Now let us explore an investment strategy that does not involve your money shrinking in value but rather multiplying over the long term.

A good investment strategy consists of the following moving parts:

  • Asset classes and asset allocation
  • Geographical diversification
  • Investment vehicle choice
  • Asset choice

You create your asset allocation by deciding in which asset classes you are going to invest how much of your FIRE target, which geographies you will invest across, and what investment vehicles you will use to hold what assets in. Let’s dive into each of these in turn.

Decide your asset allocation and geographical diversification

The first step here is to decide how much money you need in your emergency fund. Your emergency fund is a stash of cash that you can access at the drop of a hat in case of an emergency. An emergency is any unplanned expense. Emergencies include unexpected hospital bills, your car breaking down suddenly, your boiler breaking down in the depths of winter, etc.

Scheduled maintenance, wedding gifts, parties and such stuff are not emergencies.

The size of your emergency fund depends on how stable your job is. If your job is reasonably secure, aim for 6 months of expenses. If your income is unpredictable because you work in sales or own a business, go for 12 months of expenses. The CED family aims for 6 months of expenses in our emergency fund.

Now onto your investments. Here we need to understand the importance of diversification, and the distinction between asset classes, assets and investment vehicles.

A good investment strategy should be diversified across different asset classes and geographies.

So what are the different possible asset classes that you can invest in, and what are the various assets under each asset class?

Asset ClassAssetTypes of AssetsExamples
EquitiesStocksIndividual Stocks, Mutual Funds and ETFsWorld Stock Index Funds (Vanguard Total Stock Market Index Fund, iShares Core MSCI World ETF)
DebtBondsIndividual Stocks, Mutual Funds and ETFsWorld Bond Index Fund (Vanguard Total World Bond ETF, iShares Core Global Aggregate Bond ETF)
P2P loansLending platformsProsper, Lending Club, Ratesetter, Twino, Bondora
PropertyPhysical propertyResidential, commercial
REITBlackstone Mortgage Trust, Vanguard Real Estate ETF (VNQ)
Metals and CommoditiesGold and other precious metals
OthersFOREXCurrencies
Crypto-assetsDirect purchase of crypto-currencies, TrustsBitcoin, Ethereum,
Grayscale Bitcoin Trust

You create your asset allocation strategy by deciding in which asset classes you are going to invest how much of your net worth, which geographies you will invest across and what investment vehicles you will hold those assets in. So a sample asset allocation strategy may look like:

  • 50% in equities
  • 15% in debt (bonds)
  • 30% in real estate (including your primary residence)
  • 5% in REIT

Then you decide within each asset class, which parts of the world you want to invest in. Within the equities asset class, a good option is a global index tracker fund. Within the debt asset class, an option is a global bond index fund. More on that in Step 5 later.

Investment vehicles

An investment vehicle or ‘wrapper’ is the account in which you hold your assets. Where you hold you assets is an important part of your investment strategy and can affect your tax burden.

Let’s look at equities and debt assets first.

The most popular way of acquiring equities and debt assets is by investing in mutual funds. If you want to learn more about mutual funds click here.

A mutual fund can exist in two forms – as a fund sold by the fund house like Vanguard and/or as an ETF that is traded on stock exchanges. Which one you should go for depends on your country and tax considerations.

If you buy the mutual fund units directly from the fund house, they will hold them for you. This is very straightforward and is usually the cheapest way of acquiring mutual funds.

Index fund ETFs on the other hand need to be purchased by you from the secondary market. ETFs can be held by your brokerage firm in a taxable brokerage account or a tax-advantaged retirement account (such as the 401k in the USA, company private pension or SIPP in the UK, CPF in Singapore etc.).

Let’s assume your FIRE destination country is your home country. Then it absolutely makes sense to consider investing in the retirement savings system. Since most retirement savings accounts cannot be touched until the state retirement age, your taxable brokerage account just needs to tide you over from the age you FIRE until the time you can touch your retirement accounts and/or start receiving the state pension.

Some points to consider here:

    • How difficult is it to access those funds? Do you have to wait until a particular age?
    • Do you get any tax benefits for paying into it?
    • Are you forced to take withdrawals as a high-fee annuity?

What if you do not have access to your home country’s retirement savings accounts for any reason, or if you do not want to invest through it because it simply is not worth your money? Then your taxable brokerage accounts become your sole vehicle for buying equities, and bonds.

Selecting your assets

General principle: Invest in low-cost passive index tracker mutual funds to minimise fees.

If you want your investment portfolio to outpace inflation significantly and generate that all-important real rate of return, you need to be equities heavy in your asset allocation. And not just in the accumulation stage but also in the withdrawal stage after FIRE-ing.

Jack Bogle, the founder of Vanguard has probably done the most for retail investors like you and me by inventing the low-cost passive index tracker fund. That’s not just my opinion by the way, Warren Buffet thinks so too!

Jack did more for American investors as a whole than any individual I’ve known…. A lot of Wall Street is devoted to charging a lot for nothing. He charged nothing to accomplish a huge amount. – Warren Buffet

There used to be a time when all you could invest in were actively managed mutual funds where the fund manager basically tried to time the market by buying low and selling high. Jack Bogle saw that this was a risky affair and sought to take advantage of two facts:

  1. The stock market in the long run always go up and
  2. Most fund managers do not beat the average returns of the stock market because of high fees they charge and because its impossible to time the market consistently

So Jack Bogle came up with a radical idea – don’t pick stocks, just buy the whole market. He did this by creating the low-cost index tracker fund. By definition, this is passive investing because the fund manager would merely replicate an index such as the S&P 500 instead of picking stocks.

Jack was right and today the majority of active fund managers do not beat the fund benchmarks. Not just in the US, but even in India when it comes to large cap funds.

So this is the foundation of the CED investing strategy – we buy mostly low-cost index tracker funds. We only buy active funds where there is no good passive fund available.

One main advantage of index funds is reduction in risk, because you are not betting on a few stocks that you picked to perform. The other advantage is that with a single fund, you can invest across the whole world!

A good example of an index fund is the iShares Core MSCI World UCITS ETF USD (Acc). This is the Exchange Tradeable Fund (ETF) version.

This fund is one of the largest in the world and invests your money across 1600 stocks in 23 developed countries of the world including the US, UK, Japan, Canada, Germany, France, Switzerland, Hong Kong, Australia, and New Zealand with only a 0.2% expense ratio. What’s more the fund covers 85% of the listed stocks in each country.

So a single index tracker fund gives you diversification across many different stocks, economy sectors, and geographies.

This fund also takes away the headache of dividends because it automatically reinvests them for you instead of paying it out to you and triggering a taxable event (dividends are typically taxed as income and taxed unfavourably by most countries, exception exist though). During the accumulation stage, you want to reinvest your dividends anyway to benefit from compound interest. So there is absolutely no point in opting for dividend payouts in this stage of your journey. What’s more, after you have FIREd and enter the withdrawal stage, in most countries selling your assets is far more tax-effective than receiving dividends which are again taxed as income.

What if you want some exposure to emerging markets also? There’s the iShares Core MSCI Emerging Markets IMI UCITS ETF which will give you exposure to 2,800 stocks from emerging markets with only a 0.18% expense ratio.

Adjust the ratio between the funds to generate the precise exposure you need. You can replicate the ratios in all-world index funds such as the Vanguard Total Stock Index fund or just create your own. For example we are 60% emerging markets and 40% developed markets when it comes to equities.

So here’s a summary of the steps in creating your investment strategy:

  1. Decide which asset classes you want exposure to
  2. Decide which geographies you want exposure to
  3. Select your assets but be equities heavy – pick low cost index tracker funds for the equities and debt asset classes
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Step 5: Withdrawal Plan in FIRE

This is one of the more complicated subjects you will have to deal with in FIRE. Simply put, your withdrawal plan needs to account for the following:

  • Withdraw the right amount at the right time(s) in the year
  • Reduce the risk of you burning through your assets too fast by reducing ‘sequence of returns’ risk
  • Minimize your tax burden in FIRE

Most of the above topics need to be addressed separately but the good thing is that strategies exist to manage each one. For example, a rising equity glide-path (or bond tent) can effectively hedge against sequence of returns risk. More on that another time.

One requirement to stay FIREd is an ability to be flexbile with spending during rough periods such as during a recession. This will prevent you drawing down your invested assets too much while they are already beaten down in value.

Let’s briefly look at the tax topic. In most countries, capital gains are taxed far more favourably than dividends which are taxed as income. What’s capital gains? When you sell units of your index funds to generate income in FIRE, you realise a ‘capital gain’. For example:

  • In the US, long-term capital gains are 0% up to a certain limit ($39,375 in 2019). Ordinary dividends are taxed as income and qualified dividends are taxed at different levels according to your tax bracket.
  • In the UK, the first £12,000 of capital gains are tax free. The capital gains tax above that allowance is 10-20% depending on the amount. Dividends are taxed at 0% up to the first £5000, and at up to 38.1% above that, again depending on your income tax bracket.
  • In India, long-term capital gains are taxed at 10%, whereas some dividends are taxed at your income tax bracket.
  • In Singapore, there is no capital gains tax but some dividends are taxable.

There are a few different strategies for generating your FIRE income in the most efficient manner but this is out scope of this article.

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Conclusion

A good understanding of personal finance is a great asset to any person, but is essential for those who aspire to financial independence. We hope that this guide serves as a gentle introduction to the world of FIRE and how to plan for it.

If you have any questions, please do ask us through the comment fields below.

Peter writes about achieving financial independence through career-hacking, online side-hustles and super-saving. Using these techniques in the last 2 years, the Counting Every Dollar family has doubled their income, increased net worth by over $200,000 and reached an 85% savings rate!

2 Comments
  1. It all comes down to savings rate! Such a good guide by the way.

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