FIRE as a movement has increasingly grown in popularity
among the millennial of the west. FIRE is the abbreviation for “Financial
Independence, Retire Early”.
This trend is gaining further traction because freedom from
the shackles of “work for living” existence allows an individual to chase
his/her passion. Who wouldn't agree that creativity and innovation blossoms where
the mind is without fear and the time is our own.
But how to reach there?
The proponent of the FIRE movement suggest the “4% rule” as
a guide. It is another name for “ Trinity study”, an influential 1998 paper
submitted by three professors for finance at the Trinity University. The study
was to determine the “safe withdrawal rates” from the retirement portfolios containing
a mix of stocks and bonds.
The 4% refers to the portion of the portfolio that is withdrawn
during the first year. If that amount cover the yearly expense of the retiree,
it is assumed that the person has sufficient assets to last for 25 to 30 years.
The market volatility and increase of the consumer price index (CPI) to keep
pace with the cost of living has been factored in a reasonable way.
This was back-tested by the authors and several other researchers
and found to be workable. However, we need to note that the tests has been
conducted based on historical data and no one know how the markets are going to
perform in the future.
