A simple thumb rule for retirement with financial independence

Published: May 3, 2020 at 11:24 am

Last Updated on February 12, 2022

This is a simple thumb rule for computing how much money we require for financial independence and retirement  – normal or early (aka FIRE).  You can also download a free e-book, an Excel sheet and an android app to answer questions like (1) what is the corpus required? (2) How long will a corpus last? (3) How much can I draw from a corpus each year? (4) What is the rate of return required?

The thumb rules discussed should only be used a rough starting point.  They suffer from limitations and more rigorous planning is necessary (links below).

What is FIRE? FIRE stands for financial independence and early retirement. Early retirement is a stage in life when you have enough money to draw an inflation-protected income for the rest of your life without having to work anymore. This does not mean one stops working. It only means one need not work for a living. Also early is a loose term. Early could be 35 or 45 or 55 or 65, it is what you say it is.

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    Financial independence could stand for early retirement or it could mean having enough corpus to not worry about an income for the next 5Y or 10Y until we pursue a new degree, a new startup etc. Obviously, if FI is sought only for a few years, a much lower corpus would be required than for early retirement.

    It is crucial to understand that the mathematics of planning for normal retirement, early retirement or FI is identical.

    So if you understand how the math works, you will not worry too much about making distinctions. Also, many people do not understand that FIRE is a calling. They do not recognise the difference between “not having the need to work for a living” and “not wanting to work for a living”. FI or RE does not mean the person will sit idle! Also, there is nothing wrong with wanting to retire normally.

    Thumb rule chart for financial independence and early retirement

    So let us get straight to it. Suppose your annual expenses are 4 lakh and you want to be financially independent for 5 years. Assuming 8% inflation and 8% post-tax return on the entire portfolio, you will need 5 x 4L = 20L. That is if inflation = portfolio return, the real return (excess return) = 0. For no real return, if you want FI for 5Y, the corpus will be 5 times your current annual expense. If you want it for 15Y, the corpus will be 15 times expenses and so on. Now read the following table for 0%, 1%,2% and 3% excess return above (8%) inflation. Use these as an extremely approximate initial guideline.  Compared to other thumb rules, this is fairly exact (mathematically) but still has serious problems as we will discuss in the next post.


    Notice that, longer the FI tenure, the more the corpus falls as the real return increases. For 30Y, the corpus falls from 30X to 21X as we increase the real return. This fall is less dramatic as we decrease the tenure. Can you guess why? Many FIRE seekers especially those who take blogs like MMM seriously complain that I am too conservative with the use of a 0% real return. We will soon see how even conservative assumptions are seriously flawed.

    I have seen FIRE blogs where the advice is to hold 70% in stocks. This is atrociously bad advice. The freefincal robo advisory template recommends lower equity allocation, earlier the retirement age. We will consider why this has been done in future posts. My aim with this is series is to build a tool to check the robustness of any retirement or FI corpus. The Excel calculator and android app linked below can answer the following questions

    What is the corpus required for FIRE?

    Given the initial annual expense (payment), return on corpus (post-tax), inflation rate and FI tenure, the corpus required can be calculated as =PV((1+return)/(1+inflation)-1,years,-payment,,1)

    Fire calculator: wjhat the is the corpus required? Calculator screenshot

    How long will a FIRE corpus last?

    Given a corpus, portfolio return, inflation rate and initial annual expenses (payment/withdrawal), we can find out how long the corpus will last =NPER((1+return)/(1+inflation)-1,-payment,corpus,,1)

    Fire calculator: how long will a corpus last? Calculator screenshot

    How much can I draw from a FIRE corpus?

    Given a corpus, return (int rate), inflation, and FI tenure (years), we can find the how much we can withdraw in the first and last year.

    1st payment: =PMT((1+return)/(1+inflation)-1,years,-corpus,,1)

    last payment: =PMT((1+return)/(1+inflation)-1,years,-corpus,,1)*(1+inflation)^(years-1)

    Fire calculator: how much can I draw from a corpus? Calculator screenshot

    What is the portfolio return required for FIRE?

    Given a corpus, inflation rate, Fi duration, initial annual expenses the portfolio return required can be calculated as =RATE(years,-payment,corpus,0,1)*(1+inflation)+inflation)

    Fire calculator: what is the rate of return required? Calculator screenshot


    Play around with these tools and let me know what you think.

    Remember that is only a ballpark estimate to get started. Serious FIRE planning will require us to understand the drawbacks of these calculations:

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      Pattabiraman editor freefincalDr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over nine years of experience publishing news analysis, research and financial product development. Connect with him via Twitter or Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.
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