Last Updated on February 12, 2022 at 6:17 pm
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.
Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! 🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥
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)
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)
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)
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)
Resources
Play around with these tools and let me know what you think.
- Get the free E-book: How to retire early in India
- Download the set FIRE calculators (excel, will work on Windows, Mac, Google sheets)
- Get the Android app from Google play: Financial Freedom Calculator.
- Use the key features of the freefincal robo advisory software template to create a start-to-finish financial plan.
Remember that is only a ballpark estimate to get started. Serious FIRE planning will require us to understand the drawbacks of these calculations:
- Beware of incorrect assumptions while planning for early retirement (FIRE)
- Want to be financially free? Do not count on frugality! Worry about the sequence of returns risk!
🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 5000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! ⇐ More than 1,000 investors and advisors use this!
New Tool! => Track your mutual funds and stock investments with this Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds and ETF screeners and momentum, low-volatility stock screeners.
- Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
- Have a question? Subscribe to our newsletter using the form below.
- Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.
Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!
About The Author
Dr 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 ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), 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.Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition is!! Watch the first lecture for free! One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course! Increase your income by getting people to pay for your skills! ⇐ More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!
Our new book for kids: “Chinchu Gets a Superpower!” is now available!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Do you want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & its content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
- Twitter @freefincal
- Subscribe to our YouTube Videos
- Posts feed via Feedburner.
Our publications
You Can Be Rich Too with Goal-Based Investing
Published by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want
This book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.Your Ultimate Guide to Travel
This is an in-depth dive into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)