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Fire: Ever wondered how much money you really need to retire? Imagine quitting your job and doing nothing, basking in the sun while your friends are stuck in their monotonous 9-to-5 jobs. You’ve figured out how to retire early, but how did you do it? Let’s talk about…
The Concept of FIRE
Gone are the days of working 10 to 12 hours a day until the age of 60. Most people didn’t realize how much money they needed to retire. Through a recent Twitter poll, not a single answer indicated a number below 10 crores. In this article, I’ll explain how much money you actually need to retire.
Understanding FIRE (Financial Independence, Retire Early)
FIRE is a movement that began in the US about three decades ago when Vicki Robin and Joe Dominguez published their bestselling book, “Your Money or Your Life”. FIRE is about accumulating enough money so that when invested correctly, it generates income equal to your yearly expenses. Joe Dominguez achieved FIRE at 31 and never had to work for money again. Can you imagine achieving that at 31 or 41?
Types of FIRE
Over the years, different types of FIRE have emerged: Lean FIRE, Normal FIRE, and Fat FIRE. Let’s explore each type:
Lean FIRE
Lean FIRE is achieved when your annual expenses are multiplied by 20. For example, if you spend 50,000 INR per month (6 lakhs per year), you would need 1.2 crores. Adjusting for inflation and aiming to achieve FIRE by 40, this number rises to 2.3 crores. To reach this, you would need to invest around 42,000 INR per month with an expected return of 11% post-tax.
Normal FIRE
Normal FIRE is 25 times your annual expenses. According to research by Trinity College, if you save 25 times your annual expenses and withdraw 4% each year, your corpus will last 30 to 40 years. For instance, with annual expenses of 6 lakhs, you would need 1.5 crores.
Fat FIRE
Fat FIRE requires having around 50 times your annual expenses, allowing you to spend more and leave a significant amount for your heirs. This is a larger number, providing substantial financial security.
Achieving Your FIRE Number
Knowing your FIRE number is crucial, but how do you achieve it? There are three pillars:
Increase Your Income
Earning more money accelerates your journey to FIRE. This could involve asking for a raise, finding a higher-paying job, starting a side gig, or optimizing your salary for tax savings.
Increase Your Savings
Instead of following the 50-30-20 rule, which can lead to unnecessary spending, create a monthly budget based on actual expenses. Invest the remaining amount at the beginning of each month.
Invest Wisely
Asset allocation is key. Diversify your investments across equity, debt, gold, and other asset classes. This reduces risk and ensures stable growth.
Asset Allocation Strategy
A suggested allocation could be:
- 60% in domestic equity (Indian stock market)
- 10% in US equity (S&P 500 ETF)
- 15% in debt (fixed deposits, debt mutual funds)
- 5% in gold (sovereign gold bonds, gold mutual funds)
- 5% in crypto
- 5% in real estate (commercial properties or REITs)
Within domestic equity, further divide into large-cap, mid-cap, and small-cap funds.
Rebalancing Your Portfolio
Rebalance your portfolio every 6 to 12 months to maintain your desired asset allocation. Market fluctuations will change the value of your investments, so regular adjustments are necessary.
The Master Financial Planner Tool
To simplify this process, use the Master Financial Planner tool. It helps you manage multiple financial goals (retirement, buying a home, children’s education) with appropriate asset allocation for each goal.
Conclusion
Understanding and achieving your FIRE number involves knowing the types of FIRE, calculating your FIRE number, increasing your income and savings, and investing wisely. Using tools like the Master Financial Planner can streamline this process, making financial independence a realistic goal.
