FAQ: Financial Independence, Retire Early (FIRE)

Published: July 30, 2023 at 6:00 am

This article addresses frequently asked questions on Financial Independence, Retire Early or FIRE.

1 What is the definition of financial independence? When a person has enough income from her investments or net worth to not only replace existing gainful employment but also combat inflation in essential expenses and lifestyle changes for the remainder of their lifetime, they have achieved financial independence.

2 What is the definition of FIRE? The broadest definition is a person having achieved financial independence and is ready to retire early from their salaried job. A more meaningful definition is financial independence which has resulted in early retirement. So achieving FIRE here means a person who has retired early and not a person who has achieved FI and has the option to retire early.

3 Does early retirement mean actual retirement from all forms of work? Certainly not! Early retirement means there is no need to work for money anymore. However, as most early or normal retirees would attest, time is best spent when it is exchanged for some compensation. So working because we want to is fine and strongly recommended for overall health.

4 I hate my salaried job and want to work part-time or create a start-up. Is this scenario considered FIRE? No, it is not. In this case, the corpus you have accumulated would most likely not last for the remainder of your lifetime. Therefore, you need to find another source of gainful employment after quitting the job you hate. So it is neither FI nor RE.

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5 How is the FIRE milestone measured? FIRE is a personal concept that depends uniquely on an individual or a family’s circumstances. Therefore it must be measured with personal yardsticks. Our robo-advisory tool offers multiple options to compute this milestone and plan for life after early retirement.

6 But I see people in FIRE discussion forums talk about 30X or 50X multiples. Are these not valid? They are valid to a certain extent to quickly measure your progress towards FIRE. However, a proper calculation is essential to quantify FIRE readiness.

For those who may not be aware, 30X means the retirement corpus is 30 times the current annual expenses that continue into retirement. If the post-tax return from the corpus after retirement is approximately equal to the inflation in yearly expenses, or in other words, the real return is zero, at 30X, the corus is expected to last for 30Y.

This is a crude estimate and should not be taken seriously. Getting a return matching inflation from the entire corpus after tax is difficult. It may seem easy when young, but things change as we age.

7 What is a safe withdrawal rate (SWR), and how is it important for FIRE? The withdrawal rate is defined as annual expenses in the first year of retirement dividend by the total corpus.

This is the inverse of the multiple mentioned above. That is, if C is the corpus and X is the annual expenses.  C = 30X (for example). The withdrawal rate is X/C, or in this case, it is 1/30.

The lower the withdrawal rate, the safer it is! Studies that usually assume 60% equity exposure after retirement have shown that 4% is a “safe” withdrawal rate. Here safe means the corpus will not deplete before the retiree does. However, recent studies have reduced this SWR to less than 4%.

Our robo-advisory tool uses a 3.2 to 3.5% SWR if income flooring or multiple annuity options are not selected. The SWR will decrease with these options. Also, see: Use this annuity ladder calculator to plan for retirement with multiple pension streams.

Retirement planning becomes quite tricky if the SWR is 4% or higher. See: My withdrawal rate is 5% – what are my post-retirement investment options?

8. Is it possible to achieve FIRE in India without going abroad? Geography is irrelevant for FIRE. What matters is the amount you can invest each month toward FIRE. If you can invest twice your monthly expense, then FIRE in the 50s is certainly possible (perhaps even earlier with some luck). If you invest more than that, you can hit the target earlier.

9. What is the role of frugality in FIRE? FIRE should be achieved without depriving yourself of any wants. If you are not naturally frugal, trying and changing to achieve FIRE is pointless. Be warned that being frugal alone is not enough, as many of our expenses are often beyond our control. See: Want to be financially free? Do not count on frugality! Worry about the sequence of returns risk!


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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 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.
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