FIRE has, well, spread like wildfire lately. We’re talking about the movement which stands for ‘Financially Independent to Retire Early’. More than a movement, it’s a life-goal sorts that many Millennials and GenZs are working towards. If you’ll read on, you’ll find out why it’s such a fascinating subject.
This is an early retirement plan that’s geared towards allowing you to make the most of not just your sunset years but also your middle years - think 40s.
One of life’s most important lessons that most of us learn early on is that the concept of a free lunch is non-existent.
With the FIRE movement, though, you are provided with the means to stretch yourself early on such that you can enjoy a longer period of retirement wherein you don’t have to work. Or in some cases, do jobs that don’t pay very well, but are fun to do.
Here we will cover all that this early retirement plan entails and the movement that it brought about.
The acronym FIRE stands for ‘Financially Independent to Retire Early’. Under the FIRE movement, a number of people have begun working towards a single goal. This goal sees them saving enough money to retire several decades (while they’re in their 30s, 40s or even 50s) before the usual retirement age.
This movement brings with it the promise of flexibility and freedom provided you act with disciple and are determined at an early age. If you wish to participate in this movement, you would be expected to save aggressively and direct a major portion of your income towards investments.
The FIRE movement gained credence once in the 1992 book titled Your Money or Your Life by Vicki Robin, and Joe Dominguez became a best-seller and inspired thousands.
The FIRE movement emphasises creating adequate savings such that passive earnings generated via investments over an indefinite time frame can offset your annual expenses. Presently, millennials serve as the largest number of FIRE supporters. This is evident from the fact that 58 per cent of them hope to retire before 65 years of age. In order to amass this amount of wealth before the traditional age of requirement, you must be prepared to lead a non-conventional lifestyle.
Here are a few characteristic traits that are linked with the FIRE movement.
As per the FIRE movement, the amount of money needed to acquire financial independence equates to 25 times your annual spending. This figure is referred to as your “FIRE number”. To understand this better, consider you currently spend ₹5 lakhs each year. By this logic, your fire number would amount to ₹1.25 crores.
Use the early retirement calculator table to assess where exactly your FIRE number would fall, keeping in mind your average annual spending.
Keeping in mind the table mentioned above, the fewer your expenses, the smaller the figure needed to achieve FIRE. Owing to this very fact, a large number of FIRE proponents value minimalism and frugal lifestyles.
As you traverse through a FIRE lifestyle, you will need to pass varied “levels” of FIRE in a bid to acquire financial independence. These levels have been discussed below.
Should you reach this level, you have enough money to offset your current lifestyle expenses as well as your living expenses. If you decide to leave the workforce, your current spending habits won’t change.
Going by the previous example, if you spend ₹5 lakhs a year right now and wish to maintain the same standard of living once you retire, your regular FIRE number would be ₹1.25 crores.
This level is indicative of your having saved adequate funds to be able to coast towards a traditional retirement. Simply put, this means that you could stop saving entirely and still be able to enjoy a traditional retirement.
To understand this better, consider you are aged 40 and have an investment portfolio worth ₹20 lakhs. Suppose this has an average 8 per cent return; you can acquire nearly ₹1.36 crores by the time you are 65 years old, owing to the power of compounding.
This level entitles you to retire earlier than planned; however, you would still need to work part-time in order to add to your income and avail of health insurance.
Let us consider you need ₹4 lakhs a year once you retire. Say, for instance, you already have ₹40,000 invested; this figure would provide you with a safe rate of withdrawal amounting to ₹1.6 lakhs each year (40,000 x 4% = ₹16,000). In such a scenario, you could be employed part-time in order to earn the remaining ₹2.4 lakhs.
This level highlights your willingness to live a frugal lifestyle that continues into retirement. Those who reach this level are willing to minimise costs and continue to spend the bare minimum, provided it entitles them to retire at a young age.
To understand this better, consider an individual who moves to a low-cost-of-living area (think rural India) and who begins to grow his own food and ensures that his spending falls below ₹1 lakh each year. His lean FIRE number would then amount to ₹25 lakhs.
This rung is diametrically opposed to the previous level. It is ideal for individuals who wish to retire early without incorporating a minimalistic lifestyle. Here, individuals have the freedom to spend freely while having sufficient money saved to do as they please.
For example, consider a couple that wishes to spend ₹15 lakhs a year, so they never need to compromise on life’s small luxuries. For them, their fat FIRE number would amount to ₹3.75 crores.
You can reach FIRE in several ways, and there is no unique method that applies to everyone across the board. Instead, your FIRE is influenced and dependent upon the circumstances you find yourself in and the goals you aspire to achieve. However, certain tenets exist that FIRE movement members adhere to and abide by. These have been touched upon below.
Retirement doesn’t necessarily indicate an idle life. A number of FIRE enthusiasts continue to work even after they’ve retired, as it is a source of pleasure and helps keep them physically and mentally engaged. Others, on the other hand, exit the workforce and either travel, have a family or follow their passions while they’re still young and healthy enough to enjoy themselves.
Ultimately the basic premise of the FIRE movement is to attain the freedom to create a life you love. By determining what this looks like and accounting for its expenses early on, you are on track to achieve it.
One of the most important aspects of FIRE is saving a big percentage of your income. This is because the more you save, the faster you acquire financial independence. Most FIRE proponents seek to save at least 50 per cent of what they earn. However, this also depends upon their timelines. Individuals hoping to retire by the time they are 30 years old will need to be more aggressive with their saving patterns in comparison to those who hope to retire by age 50.
Compounding is heavily relied upon by those hoping to achieve FIRE. To understand this better, let us assume that you need ₹5 crores to achieve FIRE, and you currently save 1.5 lakhs a month. If this money is saved in a savings account wherein little to no interest is earned, it will take you over 27 years to achieve FIRE.
That said, if you choose to invest the same amount and earn an 8 per cent annual return on average, you will be able to attain FIRE in almost half the time.
Some of the merits associated with FIRE are as follows.
Some of the shortfalls associated with FIRE are as follows,
Assess varied aspects of your life, prior to taking the plunge and choosing the FIRE lifestyle. Life can be hard, and maintaining a good work-life balance is important. While saving and investments are almost always a good idea, only go as far as you can extend yourself.
At Fi, we recognise the importance of saving and investing, owing to which we provide you with the best financial tools in the market today. Open an account with us and learn more on our website.
A1. Vicki Robin and Joe Dominguez are credited with starting the FIRE movement.
A2. The acronym FIRE stands for financial independence, retire early.
A3. The FIRE movement encourages individuals to live frugally and make extreme savings and investments. These actions are emphasised such that early and comfortable retirement can be enjoyed.
A4. FIRE movement refers to a lifestyle movement that focuses on providing people with the tools of extreme saving and investing to gain financial independence and retire early.
A5. The FIRE movement began in the last decade of the 20th century following the popularity of the ideas penned in the 1992 book titled Your Money or Your Life by Vicki Robin and Joe Dominguez.