FIRE movement: Financial independence and early retirement plan

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The full form of FIRE is “financially independent to retire early”. As per the FIRE approach, you must save an adequate retirement fund to retire early while in your 40s or even 50s – essentially before the standard retirement age i.e., 60. This move brings in the assurance of freedom and flexibility, provided you are disciplined and determined toretire at an early age.

If you are one of those looking tomake use of the FIRE approach, you must invest insecurities such as a mutual fund, especially an equity fund, aggressively by directing a massive amount of your income towards retirement savings and investments.Read on to understand the mechanism of how the FIRE movement works.

Here are some of the characteristic traits of the FIRE movement

FIRE movement stresses on forming sufficient retirement investments, not just through savings but also by forming a source of passive earnings. To amass an adequate retirement fund before the conventional age of retirement, you must get prepared to live a non-conventional life during your work life. Some characteristic traits of the FIRE movement include:

Adequate savings – You must ensure to invest over 50% of the money you earn every month.

Frugal lifestyle – The more you can invest in a mutual fund, especially equity funds, the faster you will be able to achieve your goal of financial independence. Hence, it’s essential to reduce discretionary expenses and live a frugal lifestyle so that you can direct more of your income towards investments.

Straightforward investing – You should consider investing in low-cost index funds, besides investing in equity funds. Also, you may consider buying rental properties toearn passive income.

Determining investing under the FIRE approach

According to the FIRE approach, the money required to attain financial independence equals 25 times your yearly spending. This specific figure is known as the ‘FIRE number’. To better understand this concept, consider your present expenditure to be Rs 3 lakh every year. So, as per logic, your FIRE number would be Rs 75 lakh. To compute your FIRE number, you must ensure to factor in your average annual spending.

Annual spending FIRE number
Rs 2 lakh Rs 50 lakh
Rs 5 lakh Rs 1.25 crore
Rs 10 lakh Rs 2.50 crore
Rs 20 lakh Rs 5 crore
Rs 30 lakh Rs 7.50 crore

From the above table, it must be clear that the lower your financial expenses, the lower would be the figure required to attain financial independence. Owing to this fact, it is a must to value a frugal lifestyle as this is the only way that can allow you to attain your FIRE number.

What are the important steps you must follow for early retirement?

As you begin your financial planning and preparation, you must ensure to factor in the below-mentioned parameters:

  • Determine retirement – Determine what you want your retirement to be like. You must determine whether you want to entirely stop working or do something that you are passionate about and earn some income from it.
  • Compute your expenditures – To start with, ensure to estimate your annual expenditures. Take thorough note of your outflow. Once you get a precise number, retirement planning will be a simple process.
  • Make your investments –You must ensure to invest in financial instruments that provide high returns like equity mutual funds. Also, you must ensure to create a source to generate passive income.
  • Prepay your loans – Ensure all your loans are prepaid before you head towards your 40s. Doing so would allow you to close your loans without incurring a highinterest and save a considerable amount for your early retirement goal.

Attaining financial freedom early in life is possible if you begin early and spend only on mandatory expenses. Also, besides preparing an adequate corpus for your early retirement, ensure to focus on your other financial goals like your ​child’s higher education, marriage, etc., too which are as important as retirement. Not focusing on your other goals may make you exhaust your corpus accumulated for your early retirement years. So be wise, plan strategically, and even factor in inflation for calculating the required corpus for all your long-term goals.

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