Financial Independence, Retire Early : Is it really possible?
FIRE means achieving enough financial sufficiency to retire from your full-time employment while still being in your 40s. In essence, it means you have to begin saving and investing very early on, so that a 9-5 job doesn't remain your sole income source.
30-year-old Ramsha always wanted to become a painter, but felt stuck in her 9-5 job, which paid her and her parent’s bills. But when she heard about FIRE, short for financial independence, retire early, she was super inspired, and also intrigued.
But through FIRE, can Ramsha fulfill her dream of becoming a painter? Is FIRE really possible for Ramsha and others like her, or was it another financial fad which can be sidestepped?
FIRE means achieving enough financial sufficiency to retire from your full-time employment while still being in your 40s. In essence, it means you have to begin saving and investing very early on, so that a 9-5 job doesn’t remain your sole income source, and you become financially independent by the time you turn 50.
Generally, those who adhere to FIRE live by saving up to 60-70% of their monthly income. This means living extremely frugally in the present, which might impact your quality of life today.
Say Ramsha’s monthly salary is Rs 40,000. Out of this, her rent and other utilities like food, water and electricity bills cost her 20,000/month. She also sends across Rs 5,000 every month for her mother’s treatment. Another Rs 10,000 goes as her personal loan EMI. In effect, she is only able to save Rs 5,000 in today’s times, since all the other are fixed expenses she cannot cut down on.
But going by the FIRE principal, she’d need to start surviving on only Rs 12,000 per month, saving the remaining Rs 28,000 for her early retirement plans. Clearly, this is largely insufficient to cover for her current expenses like rent, food and other liabilities.
Another thumb rule of FIRE movement is that your overall corpus should be at least 25 times your total annual expenses. Since Ramsha’s monthly expenses are about Rs 35,000/month, her annual expenses would come down to Rs 4,20,000. Hence, she would need at least Rs 1,05,00,000 to be able to retire at 50.
Remember, this is the minimum amount she would need. Her actual requirements, after accounting for inflation and her post-retirement needs of healthcare, medicines etc. would certainly be far more. Clearly, this approach would leave her stranded- neither will she be able to enjoy her present sufficiently, nor will she end up with adequate corpus for her retirement.
In order to sustain her corpus, she will also have to limit her maximum annual withdrawals from it at 4%, or at Rs 4,20,000/year. This can be easy at first, but difficult to continue ahead, especially in old age, where health-related and other expenditures are bound to rise steeply.
Importantly, to retire early, you also need to be 100% debt-free, lest a major portion of it goes towards repaying your loan obligations. This would mean more strain on Ramsha’s already frugal finances, since she will have to pay off all her existing loans by the time she turns 50.
SEBI RIA Jay Thacker illustrates that if one aims for retirement in their 40s, then the planning should ideally start in their 20s. Only then is it possible to accumulate the necessary corpus. And in order to begin in 20s, one needs to be amongst the top percentile bracket of the national earning average. Also, income certainty over a long period of time is crucial to long term planning.
“In Indian context, FIRE is possible only for a small fraction of the population, who are capable or lucky enough to earn significantly more than their expenses. Or, only those doing aggressive savings from a very early age can even consider FIRE”, Thacker notes
Risk-it-all approach
Also, in order to grow your savings to such a large portfolio, nothing but an ultra-aggressive risk profile would work. A combination of high-risk, high-return investment avenues like direct equity, alternate and international investments would be needed to generate inflation beating real returns. Remember, nothing is beyond the bound for an aggressive Investor with a FIRE Goal.
If you think Ramsha could have achieved FIRE, had she begun saving earlier, think again. Most of us, like Ramsha, get our first jobs at 24-25, and planning for retirement isn’t one of our immediate priorities. Hence, as tempting and seemingly easy as this may sound, FIRE is not for everyone.
Per Krishan Mishra, CEO, FPSB India, “Choosing when to retire should be a personal decision, not constrained by arbitrary age criteria. Embracing early retirement is not just a possibility; it’s a pathway to freedom that demands advance planning. The journey to financial independence begins with the inception of your career, urging you to initiate financial planning with your very first pay cheque”.
Plan for retirement first
Let alone retiring early, India is still taking baby steps in terms of planning for retirement post 60. Per PGIM India Mutual Fund Retirement Readiness Survey 2023, 24% of Indians were inching towards depending upon their family members post-retirement.
Moreover, more than 50% individuals had made a financial plan for their retirement all by themselves, sans any professional help. Worryingly, 39% of even those who seemingly have a retirement plan in place do not know the exact retirement corpus they need.
Mishra highlights that it is essential to seek guidance from a Certified Financial Planner Professional to make one’s financial plan more resilient and relevant. “Regular reviews, especially after major life events, ensure that the plan aligns with evolving needs and goals. Adapting the financial plan to changing circumstances is fundamental to its effectiveness”, he says.