Financial independence: What is FIRE and how can you achieve it?

Although the origins of the FIRE movement are unknown, a book ‘Your Money or Your Life’ written by Vicki Robin and Joe Dominguez in 1992 popularised some of the concepts of FIRE.

A deep aspiration to retire early and become financially independent is not uncommon in the corporate world these days since the knowledge workers are made to slog round-the-clock for their daily bread. 

“Become financially independent at a young age can help you really discover and follow your true passion,” says Akshar Shah, Founder, Fixed Invest.

Consequently, an increasing number of people now harbour a dream of quickly earning enough so that they don’t need to depend on a 9-5 job for their livelihood anymore.  

Some prefer to accumulate enough that they don’t need to depend on any more earning, while others opt for remaining invested in securities even after retirement and then withdraw small portions (between 3-4 percent) every year, while the remaining corpus remains locked in investment. 

What is FIRE?

Literally, it stands for financial independence and retire early. The proponents of this philosophy believe in frugal expenditure and a higher amount of savings – as high as 70 percent of their income. 

By aggressively saving and investment, the followers of FIRE philosophy manage to retire early and become financially independent.

“By starting planning early, it is possible to retire early, in the 40s. For this, it is important that there is a clear strategy built on how this will happen i.e., separation of essential expenses and nice to have expenses, a good estimate of the retirement corpus needed, and  a strong savings and investment rate, so that the goal can be achieved,” said Vishal Dhawan, Founder and CEO of Plan Ahead Wealth Advisors.

How can one achieve FIRE?

Although there are a number of ways to achieve FIRE based on the variant of FIRE. However, in all these variants, some of the steps are common that are listed here:

1. Saving aggressively i.e., around 70 percent of monthly income in order to save at a faster pace. This helps the investor to accumulate enough money at a young age and thereby retire early. 

“An investing approach that can help you become financially independent and also used by high networth individuals is the Safety Pot approach where you invest about 15 times your annual expenses in safe, fixed income investments such as FDs and bonds. This ensures your lifestyle expenses are maintained and managed irrespective of any market fluctuations or volatility,” adds Akshar Shah.

2. Spending in a frugal way: During the earning years, followers of the FIRE movement refrain from overspending even if they can afford to. The idea is to save and invest as much as possible. 

3. Disciplined investing and planning: The amount that is saved has to be invested at the earliest and kept invested for the longest time possible so that it gets sufficient time to grow in size. However, all the saving and investing is done after careful planning and evaluation. 

4. Lowers risk appetite: Since the time horizon for wealth creation is shorter for the FIRE followers, it is not advisable to risk all the money by investing in equity. Therefore, investors have to invest with a lower risk appetite. 

“Investment can happen in growth assets such as diversified equity or equity mutual funds, and as one needs closer to the funds requirement, the same should gradually be moved to more defensive assets,” Mr Dhawan adds 

5. The Rule of 25: The rule of 25 says that investors have to account for saving enough for the post-retirement so that they can lead the same lifestyle even after retirement. As a result, they need to accumulate a corpus which is 25 times of their annual expenditure. 

For instance, if an investor spends ₹10 lakh in one year, he will need ₹2.5 crore (10 lakh X 25) in order to retire early, as per the rule of 25.

6. Usage of credit cards: Since the thrust of FIRE followers is on saving more and spending less, investors can’t afford to use too many credit cards. As a result, the reliance  on credit cards should be as good as ‘nil’ for the FIRE followers. 

7. After retirement: The philosophy of FIRE doesn’t end merely by accumulating enough savings, the challenging part begins after retirement. Since the retired life is longer in case of FIRE, the annual withdrawal has to be bare minimum – i.e., not more than 3-4 percent. 

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Updated: 06 Nov 2023, 09:08 AM IST