FIRE (Financial Independence, Retire Early)

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In this post let us discuss about the FIRE movement which is gaining popularity in India since last couple of years.

FIRE (Financial Independence, Retire Early) movement has a cult following in the western nations, which was inspired a book named “Your Money Your Life” by Vicki Robin and Joe Dominguez and was written way back in 1990’s.

After so many years people are finding the book’s importance.

What is FIRE (Financial Independence, Retire Early)?

FIRE or Financial Independence, Retire Early is all about creating enough wealth for yourself so that you can skip the rat race and you don’t have to work for 9 – 5 Jobs for your daily needs.

Once you achieve FIRE, your wealth is enough to generate inflation adjusted returns which will last a lifetime.

Interesting things about FIRE

Methods followed by the FIRE movement users:

  • Being frugal
  • Using extreme saving methods such as saving almost > 50% of the income
  • Generating money through various passive incomes

It appeals to those who:

  • Want to quit work and escape the rat race of 9 – 5 job
  • Are dissatisfied with consumerism
  • Want to gain financial independence
  • Move their retirement age forward

It seems to have gained more appeal as a result of the pandemic, approximately one in four 18 to 35 year old are setting early retirement as their new financial goal, according to research by the wealth management firm Moneyfarm.

How does FIRE work?

FIRE’s magic calculation says:

  • You need have your net worth build up of at least 25 – 35X more than your current annual expenses and spending to achieve financial independence.
  • You can then withdraw around ~4% of that corpus each year

We will check this formula later in the post.

But lets first balance out the elements which are essential for FIRE plan:

  • You must have an emergency fund ready which may be 6 months worth of your daily necessities.
  • Grow your savings by investing in simple Index funds like Nifty 50 or Sensex.
  • Must have Health and Term Insurances.
  • Not much important but owning a house might also help

We have to keep in mind about these things so that we won’t be touching our Retirement Fund for other needs.

How much do you need to retire early

If your Monthly expenses are Rs 50,000 which becomes Rs 6,00,000 annually.

Lets take an example:

  • Your age is 25
  • Your salary is Rs 1,00,000
  • Monthly expenses are Rs 50,000 || 50,000 * 12 = 6,00,000/year
  • You wish to save 50% which is Rs 50,000
  • You wish to retire at an age of 45 (45-25=20 >> You still have 20 years)

Lets do some Calculations:

  • You will need 6,00,000 * 35 = 2,10,00,000 in order to lead a peaceful life at the age of 45
  • You can invest in an Index fund as we discussed earlier which has given historical CAGR of ~14%
  • And you invest that 50,000 in an Index fund your corpus after 20 year period would be ~5,00,00,000 >> Which is far more greater than the expected 2,10,00,000
  • Adjusting to inflation ~6% (India’s Average) your monthly expenses would be Rs 1,60,000
  • If you withdraw 4% every year from the that corpus which would be around Rs~20,00,000 which is also far more enough than the required amount.
  • You can withdraw this money indefinitely as your investment amount is growing at the rate of 12-14 % ****This is a just for an example you can adjust the values and the have not considered the step-up amount as you might increase the monthly investment

Types of FIRE

Yes there are varieties in FIRE, broadly there are 3 of them:

  • Fat FIRE:
    • Being able to retire without altering your current living standards. This one requires extreme levels of saving and investing strategies.
  • Lean FIRE:
    • One can change to a minimalist style of living and cut their expenses to the bone till retirement.
  • Barista FIRE:
    • This lies between the two fat and lean FIRE. Maintaining more than a minimalist lifestyle in retirement through a combination of savings and any other side hustle.

The Risks of FIRE

Some people argue that FIRE concept carries big risks. At the 25-35x yearly expenses with a “safe 4% withdrawal rate “ might be enough for 30 year retirement plan. An individual retiring at age 40, rather than the traditional retirement age of 65 might outlive their savings. Some individuals pursuing FIRE try to mitigate this risk by investing in passive income streams, like rental properties, to help boost their annual cash flow. Others choose income producing activities that are meaningful to them, such as running profitable blogs or starting businesses built on their passions. David Blanchett, head of retirement research at Morningstar, says that while wanting to retire at 30 is unrealistic for most Individuals, the general principle of financial independence is something everyone should be striving for. “My concern with what I’ve heard about FIRE is mostly about outliers in an impossible situation, so it doesn’t really connect well and isn’t realistic,” Blanchett says. “But the concept of saving more is one thing as a society that we need to do. People really need to ask themselves, what is really important to me? And then build financial goals around it.”

This is all for this post. Please feel free to reach out in case of any feedback.


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