Igniting FIRE - Steps and strategies to retire early

Friday, May 03 2024
Source/Contribution by : NJ Publications

Retirement marks the beginning of the golden years of one’s life, a life marked with relaxation, exploration, and fulfilment, making it a perfect reward for years of hard work. Freed from the demands of the workplace, retirees often discover newfound passions, embark on adventures, travel the world, or simply relish in the joy of spending quality time with loved ones. In India, the conventional age for retirement is 60. However, everyone dreams to retire early and begin these golden years as early as possible. But to retire early, one needs to put in a lot of effort to build a roadmap to achieve this target.

To break the norm and transition from the conventional retirement age to retire early, the FIRE (financial independence, retire early) movement is gaining momentum all over the world. FIRE promotes the concept of saving more now and living a conservative life to retire as early as the age of 40. The origins of this concept are not well known, but was popularised in a book called ‘Your Money Your Life’ by Vicki Robin and Joe Dominguez. While this is an American concept, let’s look at this in terms of the Indian context.

Achieving FIRE

• Saving 50-70% of income - To retire by the age of 40, one must save about 50-70% of their income. To achieve FIRE, one needs to strictly follow the strategy of ‘save first, spend later’. The aggressive savings rate may seem daunting; however, by saving a substantial amount of your income, one can aim to rapidly accumulate wealth and build a sufficient corpus to sustain a desired lifestyle while letting go of traditional employment income.

• Economic discipline - The FIRE movement emphasizes the importance of modest living, cutting unnecessary expenses, and finding creative ways to increase income. Some common principles, such as starting early, being consistent, and investing in a disciplined manner, can be effective in achieving the FIRE goal. One should also avoid opting for loans and have sufficient insurance and emergency corpus in place to avoid withdrawing from the retirement corpus prematurely.

• Investing wisely - To achieve FIRE, one must invest a larger portion of their income as compared to average investors. Hence, this amount should be invested in a place that gives one an opportunity to build considerable wealth. Equity mutual funds arise as one such investment avenue where investors can build wealth in the long term.. Even a small SIP of just Rs 10,000, invested 25 years ago, would now have built a corpus of Rs 1.88 crore. (Assuming investment in Equity Fund and an average return of 12.64% p.a. as per AMFI Best Practices. Guidelines Circular No. 135/BP/109/2023-24 dated November 01, 2023.)

With mutual funds, one can invest with flexibility and ease. SIPs in mutual funds would further enhance the accessibility and affordability of investing. An SIP would also automate investing, hence providing the benefits of consistency and disciplined investing.

• Rule of 25 - The rule of 25 is a guiding principle to determine the retirement corpus required to achieve FIRE. According to this rule, one must multiply their annual expenses at the time of retirement by 25 to determine the amount of corpus required to retire comfortably. For example, if an individual's age is 25 and monthly expenses amount to Rs. 50,000, then first, they would have to calculate the retirement expenses based on inflation. Consider the inflation is 6% and the retirement age is 50. At this rate, the monthly expenses at the time of retirement would be Rs 2,14,594. Finally, to calculate the required retirement corpus, annual expenses need to be multiplied by 25. Hence, the corpus would be 25*(2,14,594 x 12), which would amount to Rs 6.44 crore.

• 4-6% rule after retirement - The process of retiring peacefully at an early age doesn’t end after building a corpus. One must also withdraw from the retirement corpus judiciously. Investors can start an SWP (systematic withdrawal plan) that can automatically generate systematic cash flows at predetermined intervals and predefined amounts. Through SWP one can not only build systematic cash flows, but they can also let the residual amount grow.

Since FIRE propagates early retirement, the number of years you stay in retirement also increases. For instance, your life expectancy is 80, and you wish to retire by 45 as opposed to the conventional age of 60, the number of years in retirement would be 35. To spend these 35 years with financial ease, one should withdraw only 4-6% of their retirement corpus for their yearly expenses. Considering that the retirement corpus is earning 8-10% CAGR during the reaping period.

Conclusion:

Achieving financial independence and retiring early can be possible by following such strategies of aggressive savings and investment. Even if it is not as early as 40, one can aim to retire by 50 or 55. Building a clear roadmap to achieve this is highly important. Every individual is unique and might have different income, financial position, responsibilities, risk capacity, and financial needs. Hence, a tailored blueprint is necessary to achieve FIRE. A mutual fund distributor or a financial advisor can understand the unique needs of every individual and guide in the journey to achieve FIRE. Get in touch with a distributor and start your journey towards FIRE today!