FIRE, an acronym for ‘Financial Independence Retire Early,’ refers to achieving early retirement. In India, the conventional retirement age is typically 60. However, if you aspire to retire significantly earlier than this standard age, around 40 or 45, it is referred to as FIRE.
About the author: Ajay Pruthi is a fee-only SEBI registered investment advisor. He can be contacted via his website plnr.in.
Attaining FIRE may present challenges, but understanding the key principles can help in its achievement:
- Start investing from a young age.
- Invest aggressively, allocate at least 50% of your income to investments.
- Continuously increase your investment every year.
- Regularly monitor your progress towards the goal.
Despite adopting these principles, there’s no guarantee of achieving FIRE due to the following factors:
- Limited time for investment and an extended period for managing expenses.
- Dependency on investment performance to meet the desired outcomes.
- The necessity for substantial career growth to sustain higher investments each year.
While pursuing FIRE, it is essential to remember that dedicating everything to tomorrow may require sacrificing the enjoyment of life in the present. It is important to balance investing for the future and living for the present.
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Is there any other alternative to FIRE? Certainly, there is an alternative to FIRE, known as Semi-Retirement.
What is Semi-Retirement? Semi-Retirement is a transitional phase between full-time employment and complete retirement. It involves reducing work hours or responsibilities, allowing individuals to balance work and leisure while still earning an income.
Now, let’s understand the fundamental differences between FIRE and Semi-Retirement:
- FIRE: In the case of FIRE, individuals choose to stop working entirely and rely on their retirement corpus to sustain themselves for the rest of their lives.
- Semi-Retirement: Individuals stop investing at semi-retirement age but can still manage their monthly household expenses until they reach their desired retirement age. During this phase, their retirement corpus continues to grow while they maintain their standard of living.
The first point regarding FIRE is straightforward and requires no further explanation.
Regarding the second point, Semi-Retirement may occur 10-15 years before actual retirement. Several scenarios may lead to Semi-Retirement without full retirement:
- Passive Income Source: Individuals might have a passive source of income, such as pursuing a passion project that generates earnings, or they may have a more relaxed job that covers their monthly expenses.
- Working Spouse: If the individual’s spouse is also employed and plans to continue working for the next 10-15 years, the household’s monthly expenses can be managed from the spouse`s salary.
Let me provide an example to illustrate the difference in the required investment amount between choosing FIRE and Semi-Retirement.
Option 1 – FIRE
Let’s consider the scenario of Ajay, a 30-year-old individual aiming to retire by the age of 45. He is married and the sole earner in his family. Ajay’s current monthly expenses amount to 30,000, and he wishes to maintain the same standard of living throughout his retired life. With a life expectancy of 85 years and his wife being three years younger, the retirement duration would be 43 years (85 – 45 – 3).
Assuming an inflation rate of 6%, the value of 30,000 after 15 years (at Ajay’s retirement) would be 72,000 per month. This inflation-adjusted amount of 72,000 per month is required for the subsequent 43 years.
To generate this monthly income of 72,000, Ajay would need a corpus of approximately 3 Crores.
Now, let’s calculate the investment required to achieve this corpus within 15 years, assuming a 9% return on investments. Since there is limited time available, Ajay may not be able to invest the entire amount in equities.
Therefore, Ajay would need to invest around 82,000 per month to attain this corpus in 15 years, assuming returns of 9% from a mix of equity and debt investments
By investing 82,000 monthly, Ajay can work towards achieving his desired corpus and ultimately attain financial independence for his retirement.
Option 2 – Semi-Retirement and Actual Retirement
Let’s consider the scenario where Ajay’s wife is also working. Ajay plans to semi-retire by age 45 but his wife is planning to work for another 15 years. If she can manage the household expenses from age 45 to 60 (assuming 60 is Ajay`s actual retirement age), the following are the calculations for the required corpus and investment:
Considering 6% inflation, the value of 30,000 after 30 years (at Ajay’s retirement) would be 1.7 Lakhs per month. This inflation-adjusted amount of 1.7 Lakhs would be needed for the subsequent 28 years.
Thus, the retirement corpus required to generate this monthly income of 1.7 Lakhs would be approximately 5 Crores.
Now, let’s calculate the investment required to achieve this corpus within 15 years Ajay can only invest until age 45, which gives him 15 years.
- Corpus required at age 60 – 5 Crores
- Amount required to achieve a corpus of 5 Crores at age 45 (assuming a Compound Annual Growth Rate – CAGR of 9%) – 1.40 Crores, i.e., 1.90 Crores will grow to 5 Crores in 15 years, assuming 9% returns.
Hence, Ajay will require a corpus of 1.40 Crores at age 45.
To achieve this corpus in 15 years, Ajay will need to invest around 38,000 per month, assuming returns of 9% from a mix of equity and debt investments
Opting for Semi-Retirement would make a difference of 44,000 in the required monthly investment.
These calculations do not consider other financial goals, and individuals may need to make additional investments for those. Moreover, the investment and corpus required will vary from person to person based on their unique circumstances.
Conclusion
You can choose between planning for FIRE or Semi-Retirement according to your preferences. However, a complete retirement at 45 may prove challenging without any meaningful activities. You may enjoy it for a few months but then may realize that it wasn’t worth the effort without any work. So, start developing a passion, a business, a source of income that will keep you busy and happy and will help your money to grow till the time you are fully retired.
Till Then, Happy Investing!
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