The popular movement known as Financial Independence, Retire Early (FIRE) encourages people to save and invest huge amounts of money in order to quit their employment much before the conventional retirement age.
A flexible and independent lifestyle is what the FIRE movement offers. But it takes a lot of self-control and resolve up front.
The majority of members of the FIRE movement take satisfaction in their high savings rate, simple investment (low-cost index investing), and frugal living (minimalist lifestyle).
Vicki Robin and Joe Dominguez’s best-selling book “Your Money or Your Life”, published in 1992, was the first to highlight many of the current generation FIRE movement ideas. In fact, the acronym ‘FIRE’ came to represent a central theme of this book, which states that “people should evaluate every expense in terms of the number of working hours it took to pay for it.”
Everything in calculating the FIRE number is based on how many years you plan to live and your annual costs. Many prospects, however, find it difficult to determine their “FIRE number,” or the amount they need to acquire in order to never again need to work. As there are several moving components, the computation is a bit complex. Every year, expenses increase, sometimes more quickly than inflation. Returns earned by the corpus must also be taken into consideration.
The thumb rule is very straightforward. Your current annual costs multiplied by the number of years you anticipate living is the corpus you will need if you want to retire now. For instance, you need to have Rs. 5 crore saved up as FIRE corpus if you anticipate living for another 50 years and spending 10 lakh annually. On the surface, this figure seems to disregard inflation, which is the gradual rise in prices. In practice, though, the corpus’s returns eventually tend to outweigh this inflation factor.
You may be aware of the well-known 4% withdrawal rule, which states that a retiree is allowed to take out 4% of their corpus in the first year after their retirement. Then, for the next 30 years or so, they should be able to take out the same amount (in absolute terms), and that amount should be adjusted for inflation. For example, if you are taking 10 lakhs for your expenses in the first year after your retirement, and understand that inflation is 7% in that year, then you need to withdraw Rs. 10.7 lakh in the second year, and so on. This equates to a corpus that is 25 times your current annual costs. However, how are the computations done?
I have tried to split the corpus calculation process into 3 basic steps:
- Estimating your yearly costs at the time of retirement is the first step in a FIRE calculation. Consider your present yearly costs if you intend to retire right away. If not, you must account for inflation in your spending. For example, yearly costs of Rs. 10 lakh now amount to around Rs. 18 lakh over a ten-year period.
- Calculate your expected retirement spending for each year, adjusting for inflation.
- Calculate your savings’ long-term rate of return. For example, if you predict debt investments to yield 7% and equity investments to yield 12% over the long term, you will arrive at a weighted average growth rate of 10% if you have 60% in stocks and 40% in bonds.
Calculating your FIRE corpus amount:
The FIRE movement as a whole revolves around this calculation. Your estimates regarding annual returns and inflation will determine the corpus.
Thumb rule:
Required corpus = (Expenses) x (number of years in retirement)
So, if you retire at 30, with a current annual expenses of 12 lakh and if you expect to live till 90 years, your estimated FIRE corpus would be 12 lakh x 60 years = Rs. 7.2 crore.
| Retirement age (years) | Life expectancy (years) | Years in retirement | Retirement corpus multiple (‘X’ times your expenses) |
| 30 | 90 | 60 | 60 |
| 40 | 90 | 50 | 50 |
| 50 | 90 | 40 | 40 |
| 60 | 90 | 30 | 30 |
The inference from this table is simple. The more the years you have after your retirement, the higher the FIRE corpus calculation multiple, and vice-versa (lesser the years in your retirement, lesser the multiple).
Use the above mentioned thumb rule to estimate your corpus, and then add the estimated rate of return for each year. Subtract the costs you predicted in step 2 for every year. A net growth number for your corpus will be determined. Because the corpus’s return will far outpace your yearly costs, this sum will be positive for the majority of your retirement. But as inflation increases, the costs will soon outweigh the returns your corpus produces, and eventually the corpus will begin to shrink. If your initial corpus value (in our example, Rs. 7.2 crore) begins to decline due to certain scenarios (such high inflation or lesser returns from your corpus), keep modifying it until it falls below zero only after you are 90 years old.
However, since you’ll probably encounter a number of unforeseen circumstances across a number of decades, it’s also crucial to factor in a sizeable buffer to your FIRE corpus. A market meltdown might lower your earnings, or inflation can be more than anticipated. Do get advice from an investment adviser registered with SEBI if you are unsure how to proceed. Avoid falling for the latest social media Finfluencers, who frequently fail to provide the precise advice needed to steer us in the right direction.
The FIRE movement has begun to get increased media attention in recent years. However, the early retirement component of the equation is only reached by a tiny minority of people. According to data collected between 2016 and 2022, just 1% of people in workforce retire between the ages of 40 and 44, 2% between 45 and 49, 6% between 50 and 54, and 11% between 55 and 59.
Final words:
The FIRE movement is essentially about having the financial freedom to live the most flexible life possible. The FIRE lifestyle necessitates proper planning, including creating an emergency fund, saving as much as you can, and making prudent investments with the money you save, regardless of your goals for an early retirement or more financial independence while still working.
When determining this FIRE number or the retirement corpus, one of the most important factors that we frequently overlook is the “taxes.” We must create a FIRE plan that is tax-efficient.
This is due to the fact that you will still be required to pay capital gains tax when you take money out of your investments. Taxes are due when you sell investments for a profit, when your bank fixed deposits generate interest, and when your investments produce dividends. Since paying taxes is a necessary aspect of the game, there is no way to avoid it. Hence when making plans for your FIRE, you must also consider taxes.
