How to Achieve FIRE – Financial Independence Retire Early
Caption: Scroll to learn about the massively popular FIRE retirement plan
In the past, people did not bother much about their retirement apart from creating a financial corpus. After they reached 60-65 years of age, they would stop working and rely on their savings to spend the rest of their lives. However, times are changing. Today, people wish to retire earlier and experience their lives to the fullest. So, the concept of FIRE or Financial Independence Retire Early is becoming increasingly popular.
What Is the Concept of FIRE?
FIRE is the acronym for Financial Independence Retire Early, a concept of early retirement made possible with small but disciplined savings. As per the tenets of FIRE, people can retire as early as they wish to, as long as they have built a substantial financial corpus.
It was made popular by the book ‘Your Money or Your Life’ penned by Vicki Robin and Joe Dominguez. Today, many millennial and Gen Z investors are embracing the FIRE movement.
The authors of this book explained that financial independence is a way of life and not simply a mere idea. It focused on the importance of moderate consumption, self-sufficiency and seeking experiences that enrich an individual’s life.
These days, young people are questioning the consumerism-led template that people have followed for a long time. Instead of working a 9 to 5 job till 60 or 65, they are increasingly choosing to retire early. Having a substantial financial corpus not only enables them to retire early but also helps them pursue their hobbies.
What Are Different Types of FIRE?
Now, let us take a look at the various types of FIRE – Financial Independence Retire Early strategies that are there:
- Normal FIRE
When an individual wants to create a financial corpus that would sustain their current lifestyles and desires, the normal FIRE is the suitable financial strategy. An important factor that people consider while formulating strategies to realise a normal FIRE plan is that their expenses will remain the same in the future.
- Lean FIRE
When an investor decides to compromise on their lifestyle costs and live at lower expenses after early retirement and builds a financial corpus accordingly, this type of strategy is known as lean FIRE. According to many financial experts, a lean FIRE strategy is a compromised version of normal FIRE.
- Fat FIRE
In a fat FIRE strategy, people have grand plans after early retirement and decide not to cut down any expenses. This financial strategy is more suitable for high-income individuals and entrepreneurs who wish to avoid living frugally after they embrace early retirement.
- Coast FIRE
The underlying concept of coast FIRE is front-loading retirement contributions of 40 years into a time frame of 10 or 20 years. Here, an individual saves aggressively till they reach an investment target and then stops contributing to his or her retirement corpus till, say, they are 40 years old.
Over these years, returns on these investments will grow exponentially due to the effects of compounding. Once an individual has accumulated a substantial amount, he or she can easily “coast” into retirement.
What Are the Steps of FIRE?
Given below are the different tenets that lie at the heart of FIRE:
Step 1: Save 50% to 70% of your income every month
If we take a realistic approach and look at this step, we will realise that it is difficult for a person to save 50% to 70% of his or her monthly income. This is because an individual has to fulfil various expenses such as rent, parents’ medical fees, children’s educational fees and home loan EMIs.
The main idea is to save as close to 50% or 70% of your monthly income as possible. To save this amount of money, you will need to plan the necessary expenses and savings.
Suggestions for boosting one’s income include asking for a raise, reskilling oneself, changing jobs for a better salary, taking up part-time jobs or extra consultancy work and working on a side hustle.
Step 2: Spend wisely and maintain financial discipline
The second step is vital because many people struggle with maintaining financial discipline. Therefore, identifying essential and non-essential expenses is essential for leading a financially disciplined life. Some of the tips for managing one’s expenses include travelling by public transport, avoiding credit card debt, cooking your meals and renting instead of buying a house.
People who are passionate about the Financial Independence Retire Early plan also suggest getting passive income such as interest from fixed deposits and dividends from stocks. Rents and income generated after monetising social media sites like YouTube are other examples of passive income.
Step 3: Make investments wisely
The third and last step involves making careful investments that can help you achieve financial independence. For this, people must ensure that their assets get enough time to grow in different financial conditions.
They can invest in index funds and other low to moderate risk mutual funds or Exchange Traded Funds (ETFs) to achieve this purpose. These funds are becoming increasingly popular among investors in India and can be used to achieve high returns. It is important to keep track of such investments to ensure that these do not turn into an underperformer.
Importance of Adjusting the Calculations to Indian Context
The concept of FIRE originated in the West, and naturally, it was based on the financial system and lifestyle of their culture. As a result, people in India may have to consider the Indian context in their quest to achieve financial independence for early retirement.
In India, the inflation rate is high, and income tax slab rates keep changing periodically. So, while people in the West could have built a retirement fund 25 times their current annual expenditure, following a similar strategy would not be enough for their Indian counterparts. But how much money would someone in India need exactly?
Please note that the example depicts an estimated amount that Arun would need. In reality, he may need more than the amount mentioned above due to variations in the inflation rate and unforeseen emergencies.
Benefits of FIRE
Listed below are the various advantages of following the Financial Independence Retire Early plan:
- It helps an individual gain the freedom and flexibility to pursue his hobbies and spend time with his family.
- It helps in effectively lowering stress levels because individuals do not have to worry about the hassles associated with a regular 9 to 5 job.
- FIRE helps people to develop the habit of aggressive savings, which, in turn, inculcates financial discipline in investors. In addition, it instils in people the importance of modest spending, investing and saving.
Limitations of FIRE
Listed below are the shortcomings of FIRE:
- Frugal spending may not always have a positive effect on individuals. For instance, if someone starts spending frugally on food and skips on important nutrition, it might lead to health problems in the future.
- People might face unforeseen and unavoidable circumstances in the future that a FIRE budget may not cover.
- Suppose an individual achieves financial independence and retires early. In that case, he or she might not be able to utilise the free time constructively, which can hurt the person’s mental and emotional health. In addition, it might have dire consequences if people decide to start a business and face monetary losses.
Does FIRE Work for Everyone?
Given below are certain important points about whether FIRE works for everybody or not:
- Although making a proper financial plan for retirement is for everyone, the same plan cannot work for everyone. A major drawback of FIRE is that it takes for granted that people will have a very large income, as, without it, people will find it difficult to build a substantial retirement corpus by 40 years.
- There is no way people can spend the same amount every year. Various emergencies are bound to demand more of our financial resources. Often, saving and investing for early retirement may mean one has to give up fulfilling their wishes in the present.
In light of the above mentioned situations, it must be noted that while people need a financial plan for retirement, it is more important to have a customised plan. This is especially pertinent if a person wishes to achieve financial independence for early retirement.
Important Points to Remember about FIRE
Given below are certain factors that people must consider before adopting a financial strategy for early retirement:
- According to many critics, FIRE is associated with a lot of risks. For example, people, who retire early, at 40 instead of 60 or 65, may easily outlive their retirement corpus.
- Early retirement may not be as glamorous as it sounds because early retirees may lose touch with friends and family. Furthermore, they may become lonely, especially when they see others are super-busy leading their own lives.
Young people are increasingly moving away from the age-old tradition of working till 60 or 65. Instead, they are choosing FIRE – Financial Independence Retire Early. It is a way of life that helps people to achieve financial independence for early retirement. Building a retirement corpus by age 40 requires a lot of discipline and meticulous planning. However, it helps a person experience different facets of life.
Frequently Asked Questions
When did the FIRE movement begin?
The book ‘Your Money or Your Life by Vicki Robin and Joe Dominguez put forward the concept of FIRE-Financial Independence Retire Early. Though the book was published in 1992, people started increasingly adopting it only after two decades.
Do healthcare expenses hinder the FIRE approach?
Many people believe that healthcare expenses may be an obstacle for someone to achieve financial independence for early retirement. However, with appropriate planning, frugal spending and prudent investments, people can build a financial corpus for early retirement even if they have large healthcare expenses.
Is the FIRE approach very common in India?
Compared to western countries, FIRE is a relatively new concept in India. However, more and more people are increasingly becoming aware of and adopting it.