Calculate your unique Financial Independence number and pave the way to your financial independence.
Have you ever thought about at what age you would like to be financially independent? Would it be around 40, 50, or 60 years old?
Most of us don’t know the answer to this question, but let’s take some time to think about it. Today, let’s discuss financial independence, why it’s important, and how to achieve Financial Independence and Early Retirement, often referred to as FIRE.
We will also learn how to calculate the amount you need to become financially independent and more.
Let’s get started!
What is Financial Independence?
Financial Independence is like building a strong bridge to a worry-free future. It’s about making wise financial decisions now so you can live on your terms later without depending on others.
To achieve this, you need a solid investment plan to support you during your later years when you no longer wish to work. However, reaching FIRE doesn’t mean you must stop working or retire completely. It means you won’t have to worry about earning money because you are financially independent.
By attaining FIRE, you can maintain your desired lifestyle without stressing about expenses. This newfound freedom allows you to pursue your dreams with peace of mind. It’s all about securing your happiness and taking charge of your destiny through straightforward calculations.
How to Achieve FIRE?
Achieving FIRE is about saving aggressively, investing in high-return instruments that beat inflation and disciplined withdrawals. If applied correctly, this will ensure you have enough money to cover your living expenses for the rest of your life.
So, let’s begin with the three crucial steps you need to take to achieve a FIRE strategy.
Save Diligently and Spend Wisely
The FIRE strategy requires saving a significant portion of your income, ideally around 50%-70%. We understand that with the rising cost of living, this can be challenging, especially in cities with high costs of living. However, don’t be discouraged; you can still work towards it by saving as much as possible, even if it’s not the full recommended percentage.
Look for opportunities to increase your income through side hustles or using your skills to earn extra money. At the same time, keep a close eye on your spending habits. There are many ways to save money, such as avoiding unnecessary expenses like frequent expensive dinners out, cooking at home instead, and saving up for big purchases to reduce the need for loans and hefty interest payments.
The next step in the FIRE strategy is to invest as early as possible and as much as possible. Why?
Let’s find out with the help of an example.
Imagine two friends, Cris and Alex, with different ages and investment plans. Cris is 40 years old, while Alex is 30 years old. Both want to retire by the age of 60.
Cris starts investing Rs 4,500 monthly in a plan offering an 8% annual interest rate. On the other hand, Alex begins with Rs 3,000 per month in a similar plan with an 8% annual return.
Since both invest Rs 10.80 lakh each, one might think their final earnings would be the same. However, that’s not the case due to the power of compounding.
After the magic of compounding takes effect, their accumulated corpus at the age of 60 looks like this:
Cris: Rs 26,68,263
Alex: Rs 45,00,886
So, despite starting with the same amount, Alex earns a significant Rs 18,32,623 more than Cris!
This is the magic of the power of compounding. The earlier you begin, the brighter your financial future becomes!
If you are a conservative or a medium-risk investor, you can also opt for a better asset allocation per your risk appetite.
How Much Accumulated Corpus Would You Need?
The 4% Rule
One widely used method within the FIRE movement is the 4% rule. It suggests that if you have built a substantial retirement fund, you can safely withdraw 4% of that amount each year to cover your living expenses during retirement without running out of money.
Suppose you are 29 years old and plan to be financially independent at 40, giving you 11 years to prepare. If your current monthly expenses are Rs 50,000, accounting for an 8% annual inflation rate, your monthly expenses after 11 years would be around Rs 1,16,000.
To find your annual expense, multiply the monthly expense by 12, which is Rs 1,16,000 x 12 = Rs 13,92,000.
According to the 4% rule, you need to determine your financial independence number. To do this, multiply your annual expense by 25, which is Rs 13,92,000 x 25 = Rs 3.48 crore.
So, to achieve financial independence and retire early, you would need a corpus of Rs 3.48 crore. With this amount, the 4% rule suggests that you can withdraw Rs 13,92,000 annually to cover your expenses during your later years without depleting the principal balance significantly.
Drawback of the 4% Rule
While the 4% rule provides a simple guideline to attain financial independence, it has some drawbacks. One primary concern is that it doesn’t consider market fluctuations or investment lock-ins. If the investment returns are significantly lower than expected or there is a market downturn, it could put the sustainability of the withdrawal rate at risk. The 4% rule also assumes a fixed annual withdrawal, which may not be flexible enough to adapt to changing circumstances.
As an alternative, you can calculate your required corpus more accurately by considering your expected expenses and accounting for inflation. DIY (Do-It-Yourself) calculations can help you personalise your plan based on your circumstances and risk tolerance.
Online calculators designed for retirement planning or FIRE planning can be valuable tools in this process. By mentioning your expected expenses, inflation rate, investment returns, and desired retirement age, these calculators can estimate how much you need to save to achieve your financial independence goal. They can also help you determine how much you can withdraw annually to sustain your desired lifestyle throughout the rest of your life.
By following these principles and maintaining discipline, you can work towards financial freedom and becoming financially independent early. Remember, the journey to FIRE may be challenging, but with determination and careful planning, it is indeed attainable.
*The article is for information only. This is not an investment advice.