Financial Independence, Retire Early (FIRE)

Learn ways to help achieve FIRE

Early retirement and financial freedom used to be topics among the high-paid group. As the concept of Financial Independence, Retire Early (FIRE) and starting wealth management early have been gaining momentum among younger generations. Their goal is, despite having a limited income, to achieve early retirement through savings and investments.

What is FIRE?

FIRE is a financial concept sought after by the younger generation that has been brought to Hong Kong in recent years. The main goal of FIRE is to attain financial independence and early retirement through aggressive savings and investment planning, in exchange of more time and means to achieve your ideal life.

FIRE Calculator

How much wealth does it take to help achieve the goal of financial freedom and early retirement?

As FIRE advocate and author of the international bestseller "Financial Freedom: A Proven Path to All the Money You Will Ever Need" Grant Sabatier wrote, when your "total assets are 25 times your annual expenses", you may then achieve early retirement. His theory is that, as long as the principal is invested in the capital market, 4% of the revenue generated per year can be used to cover living expenses and become stable passive income, making early retirement achievable. The formula above should be taken as reference only. After all, everyone’s starting point, consumption pattern, and investment risk tolerance are different, and the formula and time needed to achieve financial freedom will naturally vary from person to person. In addition to the formula above, there are also many FIRE calculators on the Internet that would provide you with data on early retirement for reference, so that you can understand how close you are to achieving financial freedom.

Financial pyramid: How to allocate assets to achieve the goal of FIRE?

Adopting the financial pyramid can be one of the ways to help achieve FIRE. The financial pyramid is a framework for managing your financial portfolio and balancing risks. Starting from the bottom, the four layers of financial pyramid are: protection, wealth accumulation, wealth building, and speculation.

Base of the financial pyramid: Protection

This base layer can provide you with a cushion to protect your welfare in case of any emergency or unexpected expenses. For example, health insurance may help prevent you from wiping out your savings from expensive treatments in times of health crisis.

Among all types of insurance plans, life protection and medical insurance are common ones that could provide financial support in case of unexpected events, and is also your safety net to protect your savings. This layer protects your financial assets, and is a critical step of your journey to financial freedom. When it comes to choosing an insurance plan, it is important to consider your insurance needs, policy premium, health conditions, coverage, etc.

3rd layer of the financial pyramid: Wealth accumulation

Once you have your protection sorted, you may start accumulating wealth with savings and low-risk products. Endowment plans and deferred annuity policies are two of the common life insurance plans with savings element.

Endowment plans provide a guaranteed cash value upon maturity while offering a life protection for assurance. As for deferred annuity policies, they are relatively long-term insurance products with an accumulation phase for the annuity to build up in value. The policyholder would start receiving stable guaranteed annuity income at annuity period. It is also important to earn extra interests with the stable stream of income to protect the value of your assets against inflation, leading the way to financial independence.

2nd layer of the financial pyramid: Wealth building

Upon having accumulated a certain level of wealth, you may start your investment journey. Common investment products at this layer include investment funds and Capital Protected Investment (CPI) Deposit. This layer offers higher potential returns yet higher risks.

Investment funds cover different regions, sectors and asset classes with a diverse range of options and flexible investment amount, helping investors seize investment opportunities across the world. As for CPI Deposit, it is a currency-linked structured product involving derivatives, with 100% capital protection at maturity and a chance to enjoy higher potential returns. Although this layer of the financial pyramid may offer higher returns, which could help accelerate reaching FIRE, one should be aware of the risks associated. 

Top of the financial pyramid: Speculation

Reaching the top of the financial pyramid, you might already have secured strong protection and enough wealth. Some aggressive investors who are well-equipped with investment knowledge and experience might start engaging in high-risk investments such as derivatives and futures.

These speculative investments may offer attractive potential returns, yet they could also lead to devastating losses. Before investing in any high-risk products, remember to assess your personal profile and risk tolerance level. It is also important to note that the higher the risk of an investment product, the less money you should put into it.

Are there any other possible ways to achieve FIRE?

1. Pursue continuing education

Taking different courses to pursue professional certificates and qualifications in your spare time may help enhance your competitiveness in workplace and grow your income with better job opportunities. Moreover, through continuing education, you may discover your interests or acquire new skills, which could possibly bring you unexpected future income.

2. Start a side job

Starting a side job, such as opening an online shop and becoming a freelancer in your spare time is a possible way to earn extra money. Yet starting a side job is no easy task, you might craft a plan starting with your interests so as to mix business with pleasure. 

3. Gain more investment knowledge

Aiming to achieve financial freedom when investing may be stressful. If you can make investment as your interest and keep acquiring more investment knowledge, you may be able to obtain higher returns in the financial market and thus increase your earnings. 

Note(s): As everyone possesses different skill sets and hobbies, the suggestions above may not be suitable to everyone and should be taken as reference only.

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Investment involves risks. Prices of foreign exchange and the relevant investment products may go up or down.

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Footnote

Other point(s) to note

  1. To borrow or not to borrow? Borrow only if you can repay!
  2. Investment involves risks. 
  3. Terms and Conditions apply. 
  4. Hang Seng Insurance Company Limited is authorized and regulated by the Insurance Authority of the HKSAR. Hang Seng Bank is an insurance agent authorised by Hang Seng Insurance Company Limited and the insurance products are products of Hang Seng Insurance Company Limited but not Hang Seng Bank.
  5. Investors should note that all investments involve risks (including the possibility of loss of the capital invested), prices of fund units may go up as well as down and past performance information presented is not indicative of future performance. Investors should read carefully and understand the relevant fund's offering documents (including the fund details and full text of the risk factors stated therein (in particular those associated with investments in emerging markets for funds investing in emerging markets)) before making any investment decision.
  6. Capital Protected Investment (CPI) Deposit is a structured product involving derivatives. The maximum potential gain is limited to the pre-agreed interest rate. Investment involves risks. Price of FX exchange may go up or down. You should read and understand all the relevant product documents/service terms and conditions and risk disclosure statements before making any investment decision.

Remark(s)

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