FIRE: The path to financial independence and retiring early

Do you want to retire early? Or eventually leave your day job to pursue your true calling? Or at least have the financial independence to have that choice? If yes, then, the FIRE movement is just what you need. The Financial Independence Retire Early (FIRE) movement is an aggressive savings and investment strategy that allows you to retire as early as your thirties or forties, depending on the extent to which you follow it. A book released in 1992 by two financial gurus ignited the FIRE retirement movement and now it has picked up again with millennials.

The FIRE movement places great emphasis on a high savings proportion and a frugal lifestyle. The aim is to build an investment portfolio that allows you to quit your job way before your retirement age and still be financially independent by means of small withdrawals regularly. In this way, it helps you achieve financial independence that lasts a lifetime and on a timeline that is a lot quicker than the conventional one with the age of retirement at 60. But how exactly to achieve financial independence and retire early? Read on to find out!


How the FIRE movement works

The three pillars of the FIRE movement and the ones that determine how well it can work for you are – savings rate, investment returns, and withdrawal rate.

1.      Savings rate

The savings rate is the percentage of your income that you can save. The higher the savings rate, the quicker you will achieve financial independence. Some of those who follow the financial independence retire early movement save up to 70% of their income and commit to an extremely minimal and frugal lifestyle by giving up on most discretionary expenses. However, there is not a set savings rate, and you can decide for yourself what rate would be feasible.

The 25x rule is a helpful way to determine how much money you need to save. Simply put, you need to consider the amount of your income that you spend today for your expenses and multiply that by 25. So, for instance, if your monthly expenditure is Rs. 60,000, you will need to save Rs. 60,000 x 25, which is Rs. 15,00,000.

2.      Investment returns

Again, the higher your investment returns, the quicker you will be able to achieve financial independence and retire early. If you choose to follow the FIRE retirement movement, then you will have to focus on investing in a way that helps with capital appreciation and offers inflation-beating returns. The portfolio will have to be rebalanced later to include investments such as fixed-income securities that will provide a regular flow of income.

The way you invest, where and how much, will also depend on your risk appetite and current portfolio. Either way, you will have to be more focused when it comes to investing than the average person since you are trying to amass a sizeable corpus in a shorter period.

3.      Withdrawal rate

Another personal finance rule that ties in with the financial independence and retire early movement is the 4% rule. It involves withdrawing 4% of your portfolio every year to support your living expenses and not having to worry about running out of money for about a 30-year period. Hence, this 4% withdrawal rate is considered a safe withdrawal rate, and a person who retires at 45 would be able to comfortably live while being financially independent at least till 75.

Again, the withdrawal rate and the period for which your investment portfolio could sustain you depends on when you start saving and investing and how extreme you are when it comes to following the FIRE movement.


Is the FIRE movement right for you?

There are several variations of the financial independence retire early movement to suit different people and their personalities and priorities. There is fat FIRE, where the focus is on savings and investments without altering your current standard of living too much. Then there is lean FIRE which involves giving up most expenses. Finally, barista FIRE involves leaving your full-time job and reducing your expenses but still having some form of part-time job. You don’t have to follow the FIRE movement or any of its iterations to a T. But applying its basic principles could help you meet your financial goals more effectively.

Does this movement ignite a FIRE in your heart? You can check out a range of investment options.


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