What is Financial Independence & Retire Early (FIRE)
Many people aspire for early retirement so that working for money is a choice and not an obligation. These people make their money work for them, rather than they work for money. This movement is known as FIRE or Financial Independence, Retire Early. Would you also like to be a part of the FIRE movement? If yes, in this article, we will give you an introduction to FIRE.
Concept of Financial Independence & Retire Early
The objective of FIRE is to help a person attain financial freedom so that they can live life on their terms without depending on a job income. Therefore, the concept of FIRE has two aspects: financial independence and retirement early.
- Financial independence: A person has achieved financial independence when their passive income exceeds their active income. The passive income can take care of all living expenses, savings and investments. The other way of achieving financial independence is by building a corpus that can take care of a person’s needs for the remainder of their life.
- Retire early: Once a person achieves financial independence, they can continue working or retiring early. Early retirement means retiring before the usual age of 60 years. Proponents of the FIRE movement prefer to retire in the age bracket of 30 to 40 years.
History of Financial Independence & Retire Early
The FIRE movement started in the United States in the 1990s. In 1992, Joe Dominguez and Vicki Robin published the book: “Your Money or Your Life.” They emphasised the concept of financial freedom. It is believed that this book sowed the seeds of the FIRE movement. From then till now, various people contributed to taking the FIRE movement to the next level. Some of these people include:
- “Early Retirement Extreme” book by Jacob Lund Fisker published in 2010
- “Mr Money Mustache” blog started by Peter Adeney in 2011
The FIRE movement got a lot of momentum after the 2008 subprime crisis. Now, it has followers all across the globe, including India.
Why do people go for Financial Independence & Retire Early?
FIRE is about freedom. Money is looked at as a medium of earning more of your own time. People have various reasons for pursuing FIRE. Some of these include:
a) Quitting the job to pursue their passion/hobby as a profession. For example, an individual is a software engineer working in an IT company. But, photography may be his passion, and he may want to engage in that. Attaining FIRE can help the person quit his software job and take up photography without worrying about finances.
b) Travel: Some people love travelling the world. So, they go for FIRE. Once their investments reach a stage where they can take care of their regular expenses and sponsor their travel, they get started with their dream travel.
c) Taking control of time: Some people pursue FIRE to take control of their time. Once they accomplish financial independence, they prefer to socialise by spending time with loved ones like family, friends, etc., without worrying about money. Some people prefer playing golf or pursuing any other sport or other activity once they achieve FIRE.
Who will Benefit from FIRE?
The majority of people assume that FIRE is only for persons with a high income, usually in the six figures. If you want to retire in your 30s or 40s, this is most certainly the case. Everyone, however, may profit from the concepts of the movement, which can help people save for retirement and even retire early, if not as early as 40.
Remember that the first part of FIRE stands for financial independence, which means that if you achieve it, you will be able to work on something you enjoy rather than something you have to do once you retire.
How to get started with your Financial Independence & Retire Early?
To get started on your Financial Independence & Retire Early journey, you need first to start saving and then invest.
- Saving: To start saving, you can adopt a budgeting method like “Pay Yourself First.” In this budgeting method, you need to set aside money for savings and investments from your monthly income. You can then use the remaining amount for monthly expenses.
- Investing: Invest the saved money in mutual funds through systematic investment plans (SIPs). You can partner with the Glide Invest App for the selection of mutual funds. Based on your goals and risk profile, the App will recommend the appropriate asset allocation with mutual fund schemes.
- Decide the age by when you would like to retire (for example, 45 years).
- Calculate the difference between life expectancy (say 80 years) and calculated retirement age (45 years). In this case, you will have to build a retirement fund that will last you for 35 years (Life expectancy 80 years – Retirement age 45 years).
- Depending on your current age (say 25 years), calculate the number of years you have in hand to build the retirement fund. In this case, it will be 20 years (Retirement age 45 years – Current age 25 years).
In the above case, you have 20 years to build a retirement fund until 45 years. The retirement fund will then last you for the next 35 years till age 80 years.
How does Financial Independence & Retire Early work?
FIRE requires individuals to save a very high percentage of their income and invest it to earn passive income for retirement years. Therefore, FIRE will depend on parameters like:
- Your savings rate,
- The amount you wish to have for early retirement,
- Number of years for which you are accumulating the retirement corpus,
- Annual withdrawal rate during retirement years.
FIRE requires a person to save 40 – 75% of an individuals’ monthly income during working years. For example, if you save 50% of your monthly income, it will take you one year of work to save one year of living expenses. At a 10% saving rate, it will be nine years of work, and at a 75% savings rate, it will be four months of work to save one year of living expenses. Depending on your savings rate, this is how it will work for you:
|Savings rate||Years/months of work to accumulate one year of living expenses|
|30%||2.3 years or 28 months|
|40%||1.5 years or 18 months|
As per the above table, based on your savings rate, you can calculate the number of months/years of work it will take for you to save one year of living expenses.
The amount you wish to accumulate for early retirement
Many proponents of the FIRE movement in the US prefer to retire early with a corpus of $ 1 million. However, everybody’s circumstances and requirements are different.
The amount that you want to save for early retirement will depend on parameters like:
- Your current annual expenses,
- Age at which you wish to retire,
- Expected life span,
- Inflation rate,
- The annual withdrawal that you will make from the accumulated corpus, etc.
You should decide your retirement corpus, taking into account the above parameters.
Number of years for which you are accumulating the retirement corpus
Many proponents of the Financial Independence & Retire Early movement in the US prefer to gather an early retirement corpus that will suffice for 25 years. However, everybody’s circumstances and requirements are different.
The number of years for which you are gathering early retirement will primarily depend on two factors: your current age and your life expectancy. Therefore, you should decide the tenure of your retirement corpus, taking into account these parameters.
Annual withdrawal rate during retirement years
Many proponents of the Financial Independence & Retire Early movement in the US prefer to withdraw 4% of the retirement corpus every year. This will make sure that the retirement fund will suffice for 25 years. However, this scenario does not factor in annual inflation, and therefore a yearly increase in expenses.
The annual withdrawal rate during retirement years will depend on your yearly expenses in your first year of retirement and the annual inflation rate.
While the inflation rate in the US is meagre, this is not the case in India. The headline inflation in India is between 4-6% p.a. However, the inflation can be double digits in some individual products and services. Therefore, based on your circumstances and requirements, you should decide the annual withdrawal rate during your retirement years and plan accordingly.
Variations of FIRE
According to Forbes Advisor, several FIRE retirement variations have arisen within the movement, dictating the lifestyle that FIRE followers are willing and able to maintain.
- Fat FIRE: This is for someone who has a traditional lifestyle and wants to save significantly more than the average worker without sacrificing their existing standard of living. To make it work, you'll need a big salary plus aggressive savings and investing tactics.
- Lean FIRE: This necessitates a considerably more constrained lifestyle, requiring rigorous commitment to minimalist living and excessive savings.
- Barista FIRE: This is for individuals who want to be somewhere in the middle of the two options above. They abandoned their regular 9-to-5 employment and lived a less-than-minimalist lifestyle through a combination of part-time work and savings. The first one allows consumers to purchase health insurance, while the second prevents them from withdrawing funds from their retirement savings.
Advantages of FIRE
Some of the advantages of joining the FIRE movement can be:
- Become Financially Independent: One would no longer need a monthly paycheck once one achieved financial independence. Financial security is, without a doubt, the most significant advantage of financial independence. While there are additional advantages to FIRE, they are typically facilitated by the financial certainty that comes with it.
- Choose a Dream Job: Although a job with a non-profit may pay less than the current job, one will be able to "retire" from the current job after one has achieved financial independence. As a result, the goal is to have more options and be able to do something special for oneself.
- Reclaim Valuable Time: Now there stands to be no obligation to exchange time for money once we reach FIRE. Instead, one can devote the time to activities that he or she truly enjoy. This could mean spending more time with family, volunteering, travelling, or doing something else that gives pleasure.
Drawbacks of FIRE
The FIRE movement's critics often fall into one of two categories:
- Some critics argue that savers are making extraordinary sacrifices in order to accomplish their early retirement objective. While this is true, proponents of the lifestyle correctly claim that it is a personal choice. Certainly, the FIRE lifestyle isn't for everyone, but those that value it are making the best decision possible. Many people defend their way of life by claiming that cutting back on spending and pursuing financial independence makes them happy.
- Other critics argue that by retiring early, FIRE participants may be taking on too much risk and making unsustainable financial assumptions.
Essentials to have in place
While pursuing your FIRE journey, you need to make sure you have the following in place:
- An emergency fund with 3-6 months of income
- Life insurance for the bread earner
- Health insurance for all family members
Boost your Financial Independence & Retire Early journey
To boost your FIRE journey, you should do the following:
- Repay existing loans at the earliest
- Avoid any new loans
- Avoid any unnecessary expenses
Financial Objectives for Financial Independence
Since a lot of people, today are opting for early retirement, it is crucial to check primary financial objectives that will help achieve financial independence and hence lead us to a happy and carefree retirement.
- Defining the Age: Defining at what age one wants to retire and planning finances keeping the age in mind.
- Regulating Expense: Examine monthly and annual expenses, such as bills, consistently spent shopping and one-time purchases such as vacations and presents. This way, we identify the savings area and hence save more than usual.
- Staying Out of Debt: Build on an Emergency fund and avoid taking debt as much as possible.
- Boost on Savings: Accumulating more excellent savings help in both simple and adverse times. Deducing a monthly saving plan will trigger financial stability.
- Investing: Start investing in retirement funds from an early stage of your life so that you hold strong on your post-retirement financial stability.
Assets to Have for Financial Independence
Pursuing FIRE is slowly and steadily becoming a choice of the masses. Before you opt for it, you need to ensure that you have certain assets to fall back on.
- Savings Account Paying High Interests
- Bank Fixed Deposits
- Stocks that Pay Dividend
- Mutual Funds with Monthly Income Plans
- Real Estate Properties
- Post Office Monthly Income Schemes
Don’t be too harsh on yourself in your FIRE attempt to retire early. Don’t live an utterly miserable life to save more money. If you are working hard to earn money, make sure you enjoy some of it. FIRE is not just about retiring early. FIRE is more about gaining the freedom to choose what you want to do. So, once you accumulate a decent corpus, you can continue working by choosing to pursue your passion and still make money.
Glide Invest can boost your Financial Independence & Retire Early journey.
With the Glide Invest App, you can plan your FIRE journey and systematically invest towards your financial goals. In addition, you will get guidance for:
- A personalised risk profile assessment
- Identifying your financial goals
- Appropriate asset allocation
- Making a financial plan for each goal
- Automating the financial plan
- Review and analysis of your financial plan
- Hand holding you till your financial goals are achieved.
Q1: What does FIRE mean, and how does it Help?
A1: FIRE is a movement that propagates Financial Independence and Retire Early. The FIRE (Financial Independence & Retire Early) movement focuses on taking control of your finances, with concepts emphasising spending less rather than earning more. FIRE concentrate on two areas that are two sides of the same coin: saving and investing more of your earnings and spending less of your earnings.
Q2: Does it even make sense to Retire early?
A2: Retiring early has its pros and cons. Health benefits, vacation chances, and the ability to begin a new job or business venture are advantages of retiring early. The disadvantages could be the financial burden of early retirement due to increased expenses, lower Social Security income, and a lower effect on mental health. However, if we back ourselves up with financial independence and financial securities, retiring early can be a good idea.
Q3: What is "Fat FIRE"?
A3: FIRE (Financial Independence Retire Early) is one of the various acronyms for Financial Independence Retire Early (FIRE). The term "fat FIRE" refers to having a significant sum of money set up to retire early. This permits you to retire early and live an upper/middle-class lifestyle.
Q4: I want to retire early, is there a To-Do-List to complete?
A4: There is no hard and fast rule to achieve the best early retirement plan. However, one should keep in mind the following before heading into early retirement.
- Define retirement Age
- Regulate your Expenses
- Stay out of Debt, or even if you have one, try clearing it.
- Indulge in Saving more
- Invest your Money