What is FIRE (Financial Independence Retire Early)

FIRE full form is Financial Independence Retire Early, which has 2 parts, first – being Financially Independent which means you no longer have to depend on anyone else for monthly income to meet your monthly expenses, second – Retire early, which means you can simply leave your job and work on your passion or not work at all! FIRE term is getting popular after the number of years you work in a corporate job and don’t want to wait until you are 60 years of age before you retire based on age.

Let us understand FIRE or Financial Independence Retire Early in more detail. You can also download the FIRE Calculator in Excel from here:

Table of Contents

What is Financial Independence Retire Early?
How does FIRE works?
- Using FIRE Calculator in Excel Video
What is the 25x rule for early retirement?
What does financial independence mean in retirement?
What is the 4% rule in FIRE?
- SWP for Monthly Income Video
Benefits of Financial Independence Retire Early
Downsides of FIRE
Conclusion

What is Financial Independence Retire Early?

Let us understand FIRE with the help of example mentioned below:

So FIRE or Financial Independence Retire Early is a term used in order to become financially independent and retiring early based on the side income or investment you have made so far
For example, when you start your career at the age of 21 to 24 years of age (or anytime you start working), the real purpose to start working at your job is to get monthly income to cover the expenses and put food on the table at the end of the day
So, ideally you work to meet your needs and wants while working towards providing to your family
Now, you can also make investments or work on a side income that helps you to get some passive income apart from your income from salary due to a corporate job
The salary you are paid for is for the years of experience and the time that you give to the company.
Where as, if your passive income starts growing the surpasses the actual income, you tend to focus more on passive income – with less number of hours and efforts you have to give to get more income
This side income helps you to become less dependent on the salary income and reduces the fear of losing your job since you are getting consistent passive income to cover for monthly expenses
And hence you become Financially Independent since you do not rely on a corporate job to get monthly income – the purpose of which was to meet your expenses initially
Since you have become financially independent, you can take retirement from your job to focus more on the side income you are generating
This retiring part is optional, since you can also continue to work in corporate job if you like your job and also work on side hustles during weekends or free time
And that is why FIRE has 2 parts – Financially Independence and Retire Early

Let us now understand How FIRE works

How does FIRE works?

While you work for monthly income in a corporate job, you either start a side hustle that earns you some extra money, or make investments using your primary income at job
Let’s consider the investment part first – even if you are able to start with Rs. 10,000 per month SIP and increase it with Rs. 2000 after every year basde on the increase in your monthly income, you would be accumulating around Rs. 8.5 Crores after 30 years at 12% expected returns
Use the Step up SIP Calculator to know your numbers
Now it depends on your lifestyle and inflation to know what will be your monthly expenses after 30 years of working when you will be around 50 to 55 years of age – well before hitting 60 years mark
With Rs. 8.5 crores, and if you keep this amount in Equity Mutual funds, you can get around Rs. 8.5 Lakh per month as passive income without doing anything at 12% rate of return, just with the help of the investments.
But it is not wise to redeem entire Rs. 8.5 Lakh per month since you also need to increase the portfolio amount to cover the expenses for next 20 to 30 years during your retirement phase. So, for this we have something called as 4% withdrawal rule which we will talk in below sections
In this way, if your monthly expenses are well within Rs. 8.5 Lakh, you can say that you have enough corpus in your mutual fund portfolio to be financially independent. The next step about retiring at this point of time depends on you. So if you love working at your job, you can continue to invest the primary income to increase your portfolio amount, or else you can take voluntary retirement as well
So this is how FIRE works with Investments that you can make. Other ption is to build a side income, which also works in same way
With side income, you need to scale the type of work that you do at a level, where the side income matches or crosses the primary income which can help you attain FIRE – Financial Independence Retire Early

Watch below video to know more about how the FIRE Calculator or Retirement Planning will work:

Using FIRE Calculator in Excel Video

Watch more Videos on YouTube Channel

What is the 25x rule for early retirement?

One important question would be how much is enough to become financially independent and retire early?

So it depends yon your monthly expenses. The 25x rule helps us to understand what corpus of amount is good for us to retire early using above mentioned staategies.

Based on 25x rule, you need to multiply your Yearly expenses to 25 to get the total amount of corpus you need to have in your mutual fund portfolio.

For example, if your current monthly expenses is Rs. 50,000, which means the yearly expenses will be approximately Rs. 6 Lakh, so Rs. 6 Lakh * 25 would give you Rs. 1.5 Crore. So this is the minimum amount you need to have in Equity mutual fund.
Remember that this amount does not include your house that you own, or car, liquid funds such as savings account or fixed deposits. This amount should be present as your mutual fund portfolio amount that would give you on average 12% returns over a long period of time.
In same way, if your monthly expense is Rs. 1 Lakh, you need to have around Rs. 3 Crore as minimum amount in a mutual fund portfolio based on 25x Rule
The only drawback with 25x rue is that, it does not consider Inflation and market volatility over long term, which may decrease the portfolio amount in mutual funds over time

Note that having 25x amount of your yearly expenses is the minimum number. You can also have 30 times, 40 times or more based on your risk appetite and to decrease the risk of running out of money when you withdraw from mutual fund portfolio during your retirement phase.

What does financial independence mean in retirement?

During retirement phase, financial Independence means that you don’t have to rely on someone else to meet for your monthly expenses, like a corporate job. You can depend on your side income or passive income you generate from the mutual funds investments.

You have the option to not retire even after you have attained financial independence. This can be the case where you like your job and want to work more to spend time with your work mates and colleagues. You may be at a stage where your spouse as well go to work to be engaged throughout the day so both of you want to be engaged even after attaining Financial Independence.

What is the 4% rule in FIRE?

This is the important step in your calculation towards attaining FIRE (Financial Independence Retire Early).

Based on 4% rule in FIRE, you should only withdraw maximum of 4% from your portfolio amount of mutual funds every year – to cover your monthly expenses and to grow the invested amount as well.
So taking above example, if your monthly expense is Rs. 1 Lakh and we have seen that based on 25x rule, your portfolio amount should be Rs. 3 Crore. In this case you withdraw only 4% – that is Rs. 12 Lakh in a year that exactly covers your yearly expenses of Rs. 12 Lakh and monthly expenses of Rs. 1 Lakh
Here’s the drawback of 25x rule that comes into picture, which means you are withdrawing the entire returns amount (12% returns expected), which does not allow your investment amount to grow over time, and with market volatility and inflation coming into picture at almost 4% to 6% every year, your expenses might increase the the portfolio amount will decrease over time
So you should be aiming to accumulate more than 25 times your yearly expenses.
At the same time, a side hustle can also support you during this time in form of passive income to withdraw less amount from mutual funds during retirement phase
4% withdrawal rule can be achieved using SWP (Systematic Withdrawal Plan), which needs good amount of corpus in mutual fund portfolio before you can retire peacefully

Watch below video on how SWP Works:

SWP for Monthly Income Video

Benefits of Financial Independence Retire Early

Below are some of the benefits of FIRE – Financial Independence Retire Early

Financially Independent: FIRE or Financial Independence Retire Early helps you to become financially independent, which means you do not have to depend on your monthly income you get from a corporate job. Either you get enough passive income from side hustle or from the investments in mutual fund portfolio
Early Retirement: You can retire early well before the age of 60 years, once you have enough corpus amount in mutual fund portfolio. Gone are the days when people used to wait untile 60 years and depend on the pension amount. You can invest by yourself and retire early these days
Work on your Passion: FIRE helps you to leave the job you don’t like and work on your passion that you always wanted to do. It can be anything like creating art, making videos, blogging, vlogging, etc. This can in turn help you get some passive income. So don’t hesitate to explore your passion and things you love to do
Freedom of Choice: Once you attain FIRE, you’ll suddenly have the freedom to choose whether it is job, the location where you stay, freedom to travel and so on. You won’t have the feeling of restrictions on doing something
Better Decision Making: With less stress due to your work, your decision making will improve as you will have more time to think about any problems before you can take decisions

So these are some of the benefits of Financial Independence and Retire Early.

Downsides of FIRE

Let us now understand some of the downsides of FIRE:

Inflation: With time, the prices of your daily needs will increase which means Inflation. This inflation can quickly reduce the portfolio amount you have in mutual fund so you need proper planning before you can take volutary retirement
Market Volatility: The riks of investing in mutual fund is during some years the market might give you lower returns than you were expecting, but the expenses will not decrease if you are not used to living a frugal life, in which case there is a risk of reducing the portfolio amount in mutual fund
Loneliness: There may be time when you have taken early retirement and do not have any side hustle to work on, you might feel alone nad get bored of not doing anything throughout the day. In this case you need to pick up somthing that you like to keep yourself engaged
Extreme Frugality: While in the process of attaining FIRE, you might live an extreme frugal life, saving on everything you can, just to increase that number in your mutual fund portfolio. You should live your life in such cases where you tend to go towards extreme frugality. Do not give up your time in 20s and 30s with an expectation that you’ll live happilly in your 50s and 60s, you won’t have that kind of body and health that you have when you are younger, so have a balance or work and enjoy while you are young even if you are working towards attaining FIRE.

Conclusion

To summarize, FIRE is a term used for financial independence and retire early, which means you can be financially independent anytime, based on the amount you have accumulated or the side income you have been working on. It has multiple benefits including freedom of choice, working and enjoying on a side hustle that provides you a side income, better decision making, etc.

At the same time, you need proper planning and execution of your investments to attain FIRE before the age of 60 years, and coering your yearly expenses at the same time

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