Retiring early, hitting the road to travel to your favorite places, and trying cuisines at different places, enjoying a carefree life where you don’t have to worry about work. A wish that everyone wants to fulfill but only a few realize.
If you are thinking along these lines and want to retire early in life to fulfill all your wishes and tick off all the boxes on your bucket list, let me tell you, the road to achieving financial independence early is tricky but definitely possible.
In this blog, we will learn about the FIRE movement – (Financial Independence Retire Early), a process that allows you to create enough wealth early in life to become financially independent. We will also look at achieving FIRE in any market situation.
What is Financial Independence?
Financial independence is when you have enough wealth to care for your expenses and maintain your lifestyle without working or depending on employment. Most people target their retirement age to become financially independent, but you can become financially independent early in life if you practice strict financial discipline and aggressive investing.
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Why does Financial Independence Matter?
Whether you want to retire early or not, becoming financially independent early should be your priority. It pays a rich dividend regarding the increased quality of life and greater mental peace. Over the past decade, jobs have evolved, and so have companies.
In good times, when the economy is doing well, companies are in expansion mode and hire aggressively to fill the gap. But, during uncertain times or when the economy performs poorly, companies tend to resort to considerable layoffs to save costs. If you don’t plan for such events and save enough for a rainy day, it can cause havoc.
Becoming financially free helps you overcome such situations and plan your future accordingly. Also, it helps you to take risks in life, which otherwise would not have been possible if you were living paycheck-to-paycheck life. It gives you the liberty to choose how to spend your time.
Achieving Financial Independence – FIRE movement (Financial Independence Retire Early)
At first, becoming financially independent is not an overnight process. It requires aggressive savings for a long time, reducing expenses, and being financially disciplined to stay on the course.
Let us see how the FIRE Movement (Financial Independence Retire Early) concept works.
The goal of the FIRE Movement (Financial Independence Retire Early) is to save and invest aggressively over 10 to 20 years to accumulate enough wealth to take care of all your expenses for the rest of your life.
Basics of FIRE Investment
- It entails savings and investing aggressively in the 20s and 30s to retire early.
- It is about focusing on reducing expenses and keeping them under control, less about boosting income.
- It involves following a low-cost investment strategy to boost returns.
How to Calculate Your FIRE Number?
You must figure out two things correctly -your annual expenses and how much you need to save to survive the post-retirement to become financially independent and retire in your 30s or 40s. So, here come the two thumb rules of the FIRE movement (Financial Independence Retire Early).
Rule of 25
The rule of 25 states that you must save at least 25 times your current annual expenses for retirement. For instance, if you have monthly expenses of Rs 50,000, which translates to Rs 6 lakh annually, you must have at least Rs 1.5 crore by the time you decide to retire.
But, given the high inflation and uncertainty, you should aim for a number greater than 25x your annual expenses to be in a safe position.
The second rule is about the withdrawal rate. How much should you withdraw from the retirement corpus post-retirement? As per the 4% rule, you should stick to the 4% withdrawal rate to ensure your retirement surplus outlasts your retirement phase. However, having a lower withdrawal rate ranging between 2.5 to 3% is better to be safe. It’s all about being prudent and reducing the risk of running out of money.
How much should you save?
Experts suggest investing at least 50% of your income to reach your goal; however, your goal to achieve financial freedom depends on the time left for your retirement. For instance, if you want to become financially independent within 10 years or less, your savings rate should be around 70% of your income.
You can use a retirement calculator to accurately calculate your retirement corpus and ideal saving rate.
The second question is -where you should invest your money. You should have a well-diversified portfolio of equity stocks and other capital assets to outperform inflation by a large margin and create wealth. You should also consider investing in tax-saving options to enjoy tax-free growth and compounding benefits.
Types of FIRE Movement (Financial Independence Retire Early)
There are five types of FIRE Movement (Financial Independence Retire Early) that you can explore:
- Lean FI: It is about creating enough corpus to meet all your essential expenses like housing, food, and utilities. You must aim for Lean FI to create a basic financial safety net for your family and yourself.
- Regular FI: It can be related to traditional retirement, where one saves enough to meet the expenses associated with the current lifestyle.
- Fat FI: It is about having enough investment where you aim to have a higher standard of living post-retirement than your current lifestyle.
- Barista FI is a phrase used when you don’t have enough savings to be called financially independent but generate enough passive income to meet daily expenses and need a modest job to make up the difference.
- Costa FI: It is when you have saved enough money and then rely on compounding to reach your target corpus without investing anymore.
FIRE investment is about investing in assets that can beat inflation by a good margin in the long run
FIRE and Low-cost Investment Strategy
Investing for FIRE and low-cost investment strategies go hand-in-hand. It is key to the value creation process. The primary aim of any investment strategy is to take advantage of compounding, and in FIRE, if you are not using it in your favor to the fullest, it needlessly lengthens the time taken to reach the goal.
For instance, opting for an expensive mutual fund instead of a low-cost index fund looks like a sensible decision but doesn’t favor the economies of investing. So let’s compare the returns of a regular and direct plan of a large-cap mutual fund to make it easier for you to understand how high costs impact your investment goals.
|SBI Bluechip Fund- Regular Plan||SBI Bluechip Fund- Direct Plan||HDFC Index S&P BSE Sensex- Regular|
|5 years return (as of 29th August 2022)||11.22%||12.15%||13.71%|
|7 years return (as of 29th August 2022)||11.90%||12.95%||13.39%|
|Value of Rs 1 lakh in a|
|Rs 1,70,182||Rs 1,77,417||Rs 1,90,021|
|Value of Rs 1 lakh in a|
|Rs 2,19,690||Rs 2,34,532||Rs 2,41,003|
The table above shows that just a percentage point increase in annual expense rate can significantly lower the return rate on your investments. With higher financial stakes, the impact will be much more significant in FIRE investment.
Similarly, if you look at an index fund that tracks either Nifty-50 or Sensex, it outperforms actively managed funds in the long term due to its low-cost investment strategy. The expense ratio of index funds is comparatively lower than any actively managed funds.
FIRE Investment and Bear Market
When you are in the market for the long run, you cannot escape the bear market, where returns get impacted severely. However, a bear market condition is a blessing in disguise for those saving for FIRE investments. It allows investors to invest at a lower price and experience more significant growth when the market conditions reverse.
For instance, since the 2008 financial market crash, despite unfavorable market conditions on multiple occasions, Nifty50 has grown almost 8 times, outperforming returns of all traditional asset classes.
Dollar-cost Averaging Strategy
Following the dollar-cost averaging investment strategy, popularly known as SIP in India, helps to smoothen your purchase price and ensure that you don’t invest all your money into stocks at high levels. In FIRE investments, bear markets are essential for long-term growth as it helps you revisit your investment strategy and make changes according to the emerging market trends to tap into growth.
While investing for FIRE, protecting your investments from volatility is as important as taking advantage of a market crash. Diversifying your investments in multiple asset classes and continuing to invest in a mix of relative winners and losers helps to minimize the overall portfolio loss.
Invest in FIRE as per market conditions
Your investing strategy to attain FIRE should not be rigid and must take advantage of different market conditions. For instance, investing in sectors that perform well during a recession can help you balance your investment returns. When the rupee tends to depreciate against the US dollar, export-oriented and IT stocks perform well, as a significant part of their earnings comes through dollar revenue.
So, identifying the sectors and stocks that weather the bear market better than others should always be your priority.
Becoming financially independent should be a goal of every individual as it offers greater financial flexibility and mental peace. The journey won’t be easy and can be emotionally draining as it requires you to forego your desires and cravings and survive at a bare minimum, but it is worth it over the long term.
FIRE doesn’t mean sacrificing all aspects of life to save for your retirement corpus. It’s all about investing smartly and making the right investment choices to achieve your financial goals. As an intelligent investor, you should always let your money do the work for you and not the other way around.
So, what type of FIRE do you want to achieve?
How do you get FIRE financial independence to retire early?
F.I.R.E Movement: Setting Up A Strategy So You Can Retire Early
The fundamental values of a FIRE strategy are simple. Begin by saving 50-70% of your income, live frugally, and maintain economic discipline. Invest your savings wisely with low-cost Index Funds.
How is financial independence retirement early calculated?
For instance, if inflation is 6%, your monthly expenses will rise from ₹50,000 to ₹1.20 lakhs by the time you turn 40. You will need around 15 lakhs a year to maintain your lifestyle. Per the rule of 25, you would need a little over ₹4 crores by 40 to attain financial freedom.
How much money do you need for FIRE?
The rule of 25 says you need to save 25 times your annual expenses if you wish to retire early. To arrive at this number, multiply your monthly expenses by 12. You then multiply the annual expense by 25 to get your FIRE number.
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