How To Calculate Your FIRE Number For Financial Freedom

Dreaming of retiring early and living comfortably without depending on a regular job? The FIRE (Financial Independence, Retire Early) movement claims to offer a way to do just that. This approach involves major planning and saving, aiming to retire much earlier than the traditional retirement age.

If you want to pursue this goal, you will have to find your FIRE number. It is the amount of money you need to have saved to support desired lifestyle without relying on regular employment.

To calculate the FIRE number, multiply your estimated annual expenses by 25. This is predicated on the notion that you can securely take out roughly 4% of your savings year when you retire. This withdrawal rate is based on research, such as the "Trinity Study," which concluded that taking out 4% of your savings every year will usually guarantee that your money will survive until retirement.

For example, if you need Rs 30,00,000 annually to cover your living expenses in retirement, your FIRE number would be Rs 7.5 crore (Rs 30,00,000 x 25).

Before you can use this rule to calculate your FIRE number, it’s important to understand your anticipated retirement expenses. While some costs may decrease after retirement, others could increase, especially if you plan to retire early.

Dont forget to consider

Housing

If you still have a mortgage, will it reduce over time? Downsizing or relocating to an area with a lower cost of living could help lower your housing expenses.

Healthcare

For early retirees, especially those in their 40s or 30s, health insurance is a significant expense. You might need to rely on private insurance or a family plan before becoming eligible for government-run health schemes.

Transportation

Without a daily commute, transportation costs may decrease. However, leisure travel could increase as you spend more time exploring during retirement.

Leisure and hobbies

Many early retirees aspire to travel and engage in other activities. These costs need to be factored into your retirement budget.

Example with real figures

Suppose you want to retire early and anticipate needing Rs 50,00,000 annually for your living expenses. According to the FIRE formula, your target savings (FIRE number) will be Rs 12.5 crore (Rs 50,00,000 x 25).

For an individual aged 30 who wants to retire by 50, they would need to save aggressively over 20 years. If they aim for an 8% annual return on investments, they would need to invest around Rs 1,14,000 per month to hit the Rs 12.5 crore target.

Investing to grow your money

Simply saving is not enough; investing is the key to growing your wealth. While a savings account might provide minimal returns, investments like stocks, mutual funds, and real estate can yield higher returns, ensuring your money grows faster than inflation.

In India, many choose to invest in equity mutual funds, index funds, and the National Pension Scheme (NPS). These vehicles offer better returns compared to traditional savings methods. For example, equity mutual funds have historically returned 12%-15% annually, which can help you grow your FIRE fund.

Picking the right investment accounts

Public Provident Fund (PPF) come with a 15-year lock-in period, making them more suitable for long-term retirement planning.

Investing in diversified equity funds or index funds can be an excellent strategy for FIRE, offering potentially high returns.