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I plan to be financially independent and retire early: Here are three ways to go about it Image Credit: Virendra Saklani/Gulf News

Dubai: Let’s say you’ve got Dh100,000 invested by age 25 or Dh200,000 invested by age 35, financial planners may then agree that you are well on your way to be financially independent and retire early.

But what type of financial independency are you aiming to achieve? Knowing your ‘FIRE’ method helps you plan your early retirement, early.

What's ‘FIRE’?

‘FIRE’ is an acronym for 'Financial Independence, Retire Early'.

It's important to separate the two - being financially independent and retiring early. Reaching financial independence gives you the freedom to: start a business, work part-time, pursue hobbies full-time, focus on a charity, spend time with family, travel, or retire early. All without worrying about your finances.

The 4 per cent rule is a general rule that many FIRE seekers use to determine how much they need to save up. It comes from the safe withdrawal rate, which says you can annually withdraw 4 per cent of your saved retirement portfolio without running out.

This means you need to save up 25 times your annual spending. For example, if you spend Dh40,000 per year, you'll need to save up Dh1 million.

Lean FIRE vs Fat FIRE vs Coast FIRE: Which ‘FIRE’ method works?

Over time, a few sub-categories branched out of the ‘FIRE’ movement. Each category comprises of people with their own strategy, depending on their lifestyle, earning opportunities, and values.

LeanFI or Lean FIRE: This takes a leaner approach, accelerating your time to financial independence by reducing how much you spend. For example, pursuers tend to spend below Dh40,000 per year and target Dh1 million saved for their FI number.

FatFI or Fat FIRE: This takes the opposite approach to LeanFI, wanting to make no sacrifices in their lifestyles during retirement. There's no set amount, but, for example, pursuers tend to spend above Dh200,000 per year and target above Dh5 million saved.

This might mean staying employed longer to take advantage of your high income years as a senior individual contributor or manager.

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‘FIRE’ is an acronym for 'Financial Independence, Retire Early'.

CoastFI or Coast FIRE: This strategy involves saving enough money where investment returns should be enough by the time you hit your retirement age.

For example, saving Dh250,000 by the time you're 30 years old. According to the Rule-of-72, your portfolio should double about every 10 years. So it should be Dh1 million by the time you're 50 years old.

What is the rule of 72 and how does it work?
The Rule of 72 is a calculation that estimates the number of years it takes to double your money at a specified rate of return. If, for example, your account earns 4 per cent, divide 72 by 4 to get the number of years it will take for your money to double. In this case, 18 years.

CoastFI means saving that initial Dh250,000 by the time you're 30, then ‘coasting’ at an easier job that might pay less. As long as you don't spend your savings, you should be set for retirement.

Fat FIRE may offer more flexibility in early retirement

There are benefits and drawbacks to both Lean FIRE and Fat FIRE. Some argue that pursuing a Fat FIRE number — regardless of how much you spend in the present — can afford greater flexibility, freedom, and even protection from unexpected events in early retirement.

With a Fat FIRE portfolio, you can do things others can't afford to do, at least not as often, experts explain. You can travel regularly during the peak season, even flying first class if it suits you. You can pick up an expensive car because you want one and you know it won't derail your FIRE plan.

You also have a better ability to trim the ‘Fat’ when times are tough. If the economy hits a stormy patch and stock values plummet, who's got more discretionary spending in the budget to cut? That's right, the Fat FIRE community.

Ultimately, it's up to you to decide how you want your lifestyle to look in early retirement and how much it will cost.

If you want some wiggle room, you may choose to aim for Fat FIRE figures. If you're ready to leave work as soon as possible and are prepared to live frugally, or you have passive income streams set up, the quickest route to early retirement is probably Lean FIRE.

Ultimately, it's up to you to decide how you want your lifestyle to look in early retirement and how much it will cost.

A different approach: Coast FIRE

If retiring early doesn't appeal to you so much as the financial independence part (i.e. not having to worry about putting money away for future needs) then you might consider Coast FIRE.

Reaching Coast FIRE means you no longer have to save money to reach retirement. The difference between Coast FIRE and regular FIRE is that with regular FIRE, you no longer need income to retire.

With Coast FIRE, you still need income to cover expenses, you just don't need to worry about saving money for retirement.

To achieve Coast FIRE, you need to choose what amount you need for retirement and exactly when. For example, if you initially planned to retire at 65 with Dh1 million.

Now you work backwards: If your money is invested and growing by 5 per cent annually, you need about Dh200,000 saved by the time you reach 30. Once you hit the mark, you won't need to save anymore for retirement over the next 35 years, thereby coasting to retirement.

This strategy can also be applied to a true early retirement, say, age 50, but your early-in-life savings mark will be higher as a result.

‘Financially independent’ vs. ‘Independently wealthy’: What’s the difference?
‘Financially independent’ (having achieved financial independence) and ‘independently wealthy’ are two terms often thrown around a lot, sometimes interchangeably. The connotation is different between these two ideas.

Independently wealthy means that through no effort of your own (independent of you), you are somehow wealthy. Maybe this is due to family wealth from an inheritance or some other means.

This is in contrast to financial independence, which implies that you once had a day job that was providing for your living expenses and that your passive income and/or investments are now covering.

So in either case, while your days may look the same, how you got there is what makes the difference.
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Achieving financial independence is hard, but mathematically quantifying it will allow you to know what to aim for.

Bottom line

Achieving financial independence is hard, but mathematically quantifying it will allow you to know what to aim for. You could set action items to achieve annually or monthly, financial planners reiterate.

There were two primary difficulties to achieving financial independence. The first difficulty had to do with the consistency needed.

At the bare minimum, you would need a decade to achieve your goal and that’s optimistic. The second difficulty had to do with the numbers needed.

Surveys show that an average UAE resident earned about Dh50,000 to Dh60,000 per year, location dependent, and given many mandatory expenses (housing, loans etc.), most people are challenged to save even Dh10,000 per year.

Therefore, achieving your financial independence number requires you to be above average, mathematically speaking.

To shorten the journey, you could lower your ‘FI’ (or financial independence) number or target amount, and increase your savings by spending less and earning more.

At the same time, knowing the number of years needed will help you set the right expectation. In fact, from this exercise you may have realised that patience was almost a required virtue needed to get to FI or financial independence.