We are at a point in history where people are sick and tired of working their lives away. They want to not just exist worrying about their finances all the time but live, truly and deeply. They want to live a life free of financial burdens giving them more time to focus on people and passions that matter to them. And to give them an out from this rat-race is the FI-RE movement which has, well, spread like wildfire lately.
We’re talking about the movement which stands for ‘Financial Independence to Retire Early’. Many millennials and members of Generation Z are working toward it as a life goal rather than just as a movement. It's an early retirement strategy designed to help you maximise both your golden years and your middle years as in your 30s, 40s, and 50s.
Source:- https://www.britannica.com/money/financial-independence-retire-early
The lesson has been to work hard, save money, and invest it for decades. You can finally retire and enjoy the fruits of your labour when you're about 65 years old. While some people may find this to be true, others are doubting this tired story. Do you have to keep working till you're 65?
Financial freedom is about figuring out what you personally need to have enough, not about being wealthy. It's about being able to leave the 9 to 5 grind and have the financial security to do so. Instead of consuming mindlessly, it's about spending money wisely.
The 1992 best-seller Your Money or Your Life by Vicki Robin and Joe Dominguez, which inspired thousands of people, gave the FIRE movement credibility. Since then, it has grown immensely popular and gained traction through online communities including blogs, podcasts, and discussion forums.
In line with this approach, a number of people have started saving money with the singular intention of retiring earlier than the typical retirement age. If you act with discipline and are determined from a young age, this movement brings with it the promise of flexibility and freedom.
Early retirement is still a desire for many people despite recent inflation, market volatility, recession fears, and rising interest rates. Although economic unrest might be unsettling, it is generally common and should be accounted for in your financial strategy.
FIRE is a long-term strategy; therefore, you can't overreact to temporary changes in the economy. Depending on market conditions, you might need to change your spending or saving habits in some years, but your underlying strategy should stay the same.
It ultimately comes down to gaining financial independence by building up a sizable nest egg that can cover living expenses without requiring employment. The foundation of this movement is the phrase "pay yourself first" which means building wealth for the future self before indulging the present self.
So, how exactly does one FI-RE? There are multiple ways to go about it but generally, one would start with assessing their current financial situation, establishing what their financial goals are, tracking their spending habits and first & foremost, working towards getting rid of debt if they have any.
There are 2 rules that are roughly followed to keep a track of retirement goals - the rules of 25 and the 4% rule.
The rule of 25 - This rule says you need to save 25 times your annual expenses to retire. You simply multiply your monthly expenses by 12 to get your annual expenses which you then multiply by 25 to get your FIRE number or the amount you’ll need to retire.
The 4% rule - This rule says that retirees can withdraw 4% of their savings the first year and then adjust for inflation in future years if necessary and not run out of money in retirement. It assumes a 30-year retirement goal, so, if you plan to retire earlier than that, this may not work for you. Caution must be exercised about following advice designed for masses, especially when it comes to determining a FIRE number.
Use strategies like purchasing used rather than new to reduce costs. Two more strategies are to learn how to do numerous home repair projects yourself rather than hiring someone else and to just buy what you need rather than everything you want.
Many FIRE participants aim to save and invest between 50% and 75% of their income. Although not necessary, you could consider taking on a second part-time job or launching a side business to boost your income.
Consider how much you will need to save and invest each year to achieve your objective of early retirement. Determine a savings rate that corresponds to the pace you want to travel at. You probably wouldn't be able to live off of real cash in a bank account for the next 40 years due to inflation. However, because of compound interest, saving and investing money in tax-advantaged retirement accounts can help you get ready for retirement. In India, for example, that could mean PPF which stands for public provident fund.
After you've invested everything, you can in these tax-advantaged accounts, open a conventional brokerage account and make any number of investments. You can continue to build on that indefinitely. Your risk tolerance will determine what you invest in, whether it's stocks, bonds, or funds like ETFs. It does need to be invested quite actively, and everyone has a different definition of what is meant by this.
Source:- https://www.jagoinvestor.com/2021/12/fire.html
A question you should ask yourself while establishing a strategy is how much money you’ll need between your goal retirement age and the age you may start taking from your retirement accounts penalty-free, which is normally around 60.
Once you come up with a number, you could consider saving that amount in your regular brokerage account. That way, if you do want to retire early, you don't run out of cash before you’re eligible to start taking qualified distributions from your retirement accounts.
Now, let’s put this FIRE strategy into perspective with an example. Imagine someone is 25 and earns 40 LPA with no prior retirement savings. Let’s say this person is saving 35% of their income (or 14 lakhs) and spending about 26 lakhs each year. Using the rule of 25, this person would need to save 6.5 crores (25 x 26 lakhs) in total to achieve FIRE (if they want to maintain their current level of spending during retirement). Assuming a 7% annual rate of return, it would take this person about 21 years to reach this goal. Based on the 4% withdrawal rule, that means this person could withdraw 26 lakhs each year. That means during retirement, they would have to live off approximately 2.16 lakhs every month.
Within the FI-RE movement, there are different types of FI-RE options available as well like:
Regular FI-RE: At this point, you have enough money to cover both your living expenses and your existing lifestyle costs. If you choose to leave your job, your spending patterns won't change. Using the preceding example, your typical FIRE number would be 1.25 crores if you currently spend 5 lakhs annually and want to maintain the same way of life once you retire.
Lean FI-RE: At this level, you've demonstrated a commitment to live frugally far into retirement. They are the people who favour leading minimalist lifestyles and are prepared to cut expenses, save the majority of their wages, and maintain their current level of consumption so long as doing so qualifies them to early retirement. Consider a person who relocates to a region with a low cost of living, starts growing his own food, and makes sure that his annual spending is less than Rs. 1 lakh to better comprehend this. Then, his slim FIRE number would equal 25 lakhs.
Coast FI-RE: At this level, you've saved enough money to be able to coast into a typical retirement. Simply expressed, this means that even if you stop saving altogether, your portfolio will still grow to fund your retirement and you will still be able to enjoy a traditional retirement. Consider that you are 40 years old and that your investment portfolio is worth 20 lakhs. Given an average return of 8%, you may amass nearly 1.36 crores by the time you are 65 years old thanks to compound interest.
Barista FI-RE: This level gives you the option to retire sooner than you had anticipated. However, in order to supplement your income and keep your health insurance, you would still need to work part-time. Let's assume that once you retire, you will require 4 lakhs each year. If you already had 40,000 invested, for example, this amount would allow you to remove 1.6 lakhs at a safe rate per year (40,000 x 4% = 16,000). You could work part-time in this situation in order to make the final 2.4 lakhs.
Fat FI-RE: This rung is for people who want to live a little. It is ideal for individuals who wish to retire early without incorporating a minimalist lifestyle. People can spend money at will in this environment since they have enough money stored. Consider a couple who wants to spend Rs. 15 lakhs annually so they never have to give up on life's little luxuries. Their "fat FIRE number" would be 3.75 crores for them.
Although it can be challenging, achieving financial independence is not impossible. However, the FIRE movement has been criticized for having a lot of restrictions and having unreasonable demands that are out of reach for many people.
Without an income that allows you to save and invest while still being able to cover your costs, reaching FIRE can be challenging. The truth is that in order to save 40%, 50%, 60%, or 70% of your income, you must have a job or a skill that enables you to earn a respectable wage. It will be quite difficult to reach FIRE if you are making 3LPA and are barely able to make ends meet.
The FIRE goal may seem completely out of reach for people who are living paycheck to paycheck with little room for savings in their budget. FIRE carries some risk; for instance, you could run out of money if unanticipated medical expenses arise, or the market performs poorly. It can be challenging to wake up with nothing to do after years of employment. After experiencing retirement, you could realize it's not the best fit for you. Your mental health may suffer if you don't make the most of this time. Your happiness will suffer if you’re skimping in several areas of your life to save money.
Furthermore, saving money in areas like food can result in health problems later on, which could bring about unforeseen events that you would not be able to plan for with a FIRE budget.
Ultimately, determining if early retirement is appropriate (or even feasible) for you will require careful consideration. As such, be sure to discuss your options with financial experts and other trustworthy individuals, and bear in mind that you'll probably need to make significant sacrifices in order to reach your objective.
Before committing to the FIRE lifestyle, evaluate all facets of your life. Even while investing and saving are generally wise decisions, just push yourself as far as you can. Create a vision for your ideal retirement and a strategy to get there. Your retirement dreams become feasible goals when you put them on paper and include a timeline.
Article by:- Disha Tiwari
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