One of the potential big mistakes early FIRE wannabes make is underestimating the effect of inflation. Sure, the numbers look rosy right now. Mr. X is able to enjoy his carefree life, playing computer games at home, playing Magic The Gathering with his friends and cultivating bonsai at his balcony. However, his lack of a stable monthly salary affects his ability to grow his portfolio, not to mention the lack of contributions to his CPF account. Most of the dividends he received would be spent on living expenses, leaving little for re-investment. If he delays his retirement by just another decade, things would be so much better. 45 is still a pretty early retirement age. All the salaries & bonuses he received in that extra decade of full-time work would enable him to grow his portfolio to a point where the returns can compensate for inflation. Furthermore, all the contributions to his CPF savings in that decade would allow him to enjoy a larger CPF Life payout at 65 years old.
Achieving Sustainable Financial Freedom
My advice to all those early FIRE otakus is to take inflation into consideration. If you are relying on your portfolio providing the cash flow to cover all your living expenses, you likely need some growth, just to increase the odds of your portfolio cashflow keeping pace with inflation. With this in mind, I would suggest:
- Delay your retirement, even if the figures show that you can retire comfortably right now in your 30s or 40s. Take my situation for example. I have a $550k portfolio generating annual dividends of $28k. I still intend to keep working.
- Keep your mind active and your body mobile by engaging in part-time work that you enjoy. That extra income can help you keep pace with inflation.