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Business News/ Money / Personal Finance/  How to use the FIRE method for early retirement?
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How to use the FIRE method for early retirement?

FIRE stands for Financial Independence, Retire Early and is a financial rule for early retirement planning.

For many individuals, early retirement is the realisation of their financial independence dream.Premium
For many individuals, early retirement is the realisation of their financial independence dream.

For many individuals, early retirement is the realisation of their financial independence dream. Early retirement offers numerous advantages, including the ability to live a stress-free retirement with your family. Nevertheless, before taking this decision, individuals should ensure that they have enough money set up for their post-retirement expenses and monthly living expenses. F.I.R.E. stands for "Financial Independence, Retire Early" and is a financial rule for early retirement planning. Hence, let's learn from our sector specialists how one may use this rule to his or her advantage and prepare for early retirement.

Dr Shuchin Bajaj ,Founder, Director Ujala Cygnus group of Hospitals

The FIRE (Financial Independence Retire Early) method is a financial strategy that aims to achieve financial independence as early as possible, typically in your 30s or 40s, by saving a significant portion of your income and investing it in assets that generate passive income.

Here are some steps you can take to use the FIRE method to retire early:

Calculate your FIRE number: Determine the amount of money you need to accumulate in order to retire early. This will depend on your current expenses, expected future expenses, and desired retirement lifestyle. You can use online calculators or consult with a financial planner to help you determine your FIRE number.

Reduce your expenses: One of the main principles of the FIRE method is to live below your means. This means reducing your expenses as much as possible so you can save more money. Consider downsizing your home, reducing your transportation costs, and cutting back on discretionary spending.

Increase your income: Another way to reach your FIRE number faster is to increase your income. This could mean getting a higher paying job, starting a side business, or pursuing passive income streams such as rental properties or dividend-paying stocks.

Save aggressively: In order to retire early, you need to save a significant portion of your income. The typical recommendation is to save at least 50% of your income, although some FIRE enthusiasts aim for even higher savings rates.

Invest in assets that generate passive income: To generate income in retirement, you need to invest in assets that generate passive income such as dividend-paying stocks, rental properties, or bonds. Consult with a financial planner to help you determine the best investment strategy for your retirement goals.

Monitor your progress: Regularly track your progress towards your FIRE number and adjust your savings and investment strategies as needed. It's also important to have a plan for what you'll do in retirement and how you'll manage your finances.

Remember, the FIRE method requires a significant amount of sacrifice and discipline, but if done correctly, it can allow you to retire early and enjoy financial freedom.

Gautam Kalia, SVP & Head Super Investor at Sharekhan by BNP Paribas

Retiring Early is not often the objective. It’s about freedom to do what you want. The rule of 25 is a good thumb rule to follow. Save 25 times your annual expenses. So if you can keep your annual expenses low and savings high early in your life, you will be able to achieve FIRE faster. Some people also go for variations of FIRE like Lean FIRE or FAT FIRE depending on how much income will they generate post retiring from their main job and how comfortably do they want to live. (Similar rule is rule of 4% - how much of your savings should a retiree withdraw every year.).

Mr. Pankaj Kumar, Partner Alpha capital

F.I.R.E stands for Financial Independence, Retire Early. It is a movement that challenges conventional methods of working until 65 years and practitioners of the F.I.R.E method hope to be able to quit their jobs in their early 40s or 30s to live the rest of their lives on small yet disciplined withdrawals made from their investments. The idea of FIRE is simple; you can retire early as long as you concentrate on extreme savings and building a substantial fund with investments. 

The goal is to pay off all your debts and start generating passive income before retirement. So, you might have to practice frugal living today to enjoy a comfortable life tomorrow. Now, the big question is, “how much money should you have post-retirement?" This can be answered with the idea of a safe withdrawal rate, a formula introduced by William Bengen in 1994. It is known as the 4% rule. According to him, your retirement fund should be 25 times your annual expenses, which allows you to withdraw 4% from the fund every year. This gives an idea about how much money you would need when you retire.

Assume your current age is 25 years and your monthly living cost is 50,000. If you want to retire by 40, you have 15 years left to accumulate the retirement fund. If the inflation rate is 6%, your monthly expenses will rise from 50,000 to 1.20 lakhs by the time you turn 40. This means you will need 14.40 lakhs a year to maintain your lifestyle. 

By this calculation, you should have a little over 4.30 crores by the age of 40 to attain financial freedom. Saving alone will not help you reach that mark unless you start investing in profitable financial products today. You must put 12.61 lakhs a year in an instrument that offers an annual 9% compound interest to accumulate 4.30 crores in 15 years. And this will require you to set aside 1.05 lakhs per month, starting from today. The core tenets of a F.I.R.E strategy are simple.

• Start by saving 50-70% of your income.

• Show economic discipline by living frugally.

• Invest your savings wisely with a low-cost Index Fund.

And that’s it. Save more, spend less, and invest wisely. These are the three bedrock principles of any F.I.R.E strategy.

Mr. Arun Kumar, VP and Head of Research, FundsIndia

FIRE (Financial Independence Retire Early) challenges conventional wisdom about working for money until you're 60 years old. FIRE supporters envision retiring from their jobs in their early 40s or 30s and living on disciplined withdrawals from their investments for the rest of their lives.

Their idea is to save and invest aggressively - somewhere between 50-75% of your income - so you can retire sometime in your 30s or 40s.

The core principles of a F.I.R.E strategy are simple.

· Save a high percentage (50-75%) of your monthly salary

· Live Frugally

· Invest your savings in a well diversified mutual fund (lot of FIRE enthusiasts gravitate towards low-cost index funds)

Nitin Rao,Head Products and Proposition, Epsilon Money Mart

The concept of FIRE (Financial Independence, Retire Early) is taken from the famous book, “Your Money or Your Life" by Vicki Robin and Joe Dominguez. It is a kind of financial strategy that aims to achieve financial independence as early as possible. It focuses on 3 core tenets: aggressive saving coupled with minimalist lifestyle that aims to reduce expenses, living in self-sufficiency and investing the savings wisely. Saving up to 70% and withdrawing only 3% are some of its components. Some ways to use it are:

A. Establishing financial goals: Budgeting is important. It helps not only in knowing how much you require now but also how much you need in future.

B. Saving aggressively: Cutting back on unnecessary expenses and prioritizing saving goals can help you achieve your financial goals. While the general rule of thumb is to save 25-30%, some people even try saving 70% of their income just to retire early.

It requires investing in equity at the beginning and then slowly shifting towards safer investments as retirement becomes due. Before following this approach, understand that FIRE method requires significant commitment to savings and investing. It may not be suitable for everyone as everyone’s financial situation, goals and risk tolerance are different. Also, this new lifestyle might be deeply gratifying, but comes with sacrificing too much.

Ms. Sonica Aron, Founder and Managing Partner, Marching Sheep

Millenials and zillenials together make up for 52% of today’s workforce of which 13% are generation ‘Z’. By 2025, it is estimated this percentage will be 75%. For today’s evolving workforce, Work is a means to the lifestyle they aspire for. And they are starting to plan early. If we look at the broadening definition of employee wellness, it encompasses physical, mental, emotional, and financial wellness.

When they look at an organization, they look at whether it meets all these criteria and whether working with the organization will enable them to meet their short and long-term financial independence goals, which are linked to learning, exposure, and growth. If a job or an organization does not enable them to plan for their long-term financial independence, either via competitive compensation structure or learning opportunities, or career paths, then they will either not take it up or move on.

Financial planning and wealth management are also something that this set of people is very woke about. This very diverse and well-read set of people is looking for individualized plans according to their own life stage, risk appetite, future goals, and time frames. They are making some very different choices like not to buy a vehicle but to Uber/Ola it or not to buy a house but to stay on rent; to delay getting married or starting a family and so on.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.

 

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ABOUT THE AUTHOR
Vipul Das
Vipul Das is a Digital Business Content Producer at Livemint. He previously worked for Goodreturns.in (OneIndia News) and has over 5 years of expertise in the finance and business sector. Stocks, mutual funds, personal finance, tax, and banking are among his specialties, and he is a professional in industry research and business reporting. He received his bachelor's degree from Dr. CV Raman University and also have completed Diploma in Journalism and Mass Communication (DJMC).
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Updated: 28 Feb 2023, 09:08 PM IST
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