When should you buy a house if your goal is FIRE or early retirement? In your 30s, 40s or 50s?
This article explores how purchasing a house affects your retirement timeline, offering scenarios based on your early retirement goals.
When should you buy a house if your goal is FIRE or early retirement? In your 30s, 40s or 50s?
Posted on 15 Dec 2024
Author: Sayan Sircar
6 mins read
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This article explores how purchasing a house affects your retirement timeline, offering scenarios based on your early retirement goals.
📚 Topics covered:
- What is the impact on your FIRE plan if you decide to buy a house in your 30s or 40s?
- Case 1: Far away from FIRE and other goals will require additional funding
- Case 2: Very near to FIRE and other goals are separately funded
- Case 3: Reached Coast FIRE but still need income for non-FIRE goals
- Case 4: Reached Coast FIRE and other goals are funded
What is the impact on your FIRE plan if you decide to buy a house in your 30s or 40s?
Assuming no inheritance, the money needed to buy the house will always impact FIRE plans. This article covers a few cases to calculate how many years you need to work extra due to a house purchase.
We will first do a back-of-the-envelope calculation before doing a more rigorous analysis. We will make the following assumptions:
- long-term portfolio real return is zero: How much portfolio return do you need over your lifetime to meet all your goals?
- salaries grow at the same rate as inflation from now until retirement
- every year of work funds N years of retired life where N > 1 (otherwise you cannot retire let alone retire early)
- the house costs X years of investments
The zero real return assumption makes life easier. We can directly calculate the FIRE corpus as expenses (current or future doesn’t matter with zero real returns) times longevity. Many practitioners consider this assumption to be conservative, but others consider it to be just right.
Using the assumption:
FIRE corpus = Expenses * Longevity
For example, if your FIRE expenses are 10 lakhs and you plan to live for the next 50 years, then the FIRE corpus is ₹5 crore (10 * 50). If you have ₹3crores already, the gap is ₹2 crore. If you are investing for 4 years of expenses (i.e. ₹40 lakhs/year), you need 5 years to reach the 2 additional crores.
If you instead buy a 2-crore house, then for the next five years, your entire investible surplus (income minus expenses) will instead go to the house and the FIRE plan will get delayed by around five years.
Note: the above calculations are not rigorous by any stretch. That will happen if you use a tool like the Arthgyaan goal-based investing calculator.
Let us now look at a few special cases.
Case 1: Far away from FIRE and other goals will require additional funding
Most investors will be in this bracket where:
- the retirement goal, early or normal, is not yet fully funded though there has been some progress via EPF, mutual funds, NPS and FD.
- there are additional goals like children’s education that will require additional funding
In such cases, only buying the first house, solely for the purpose of staying i.e. self-consumption is possible. The priority at this point will be to only spend as much as needed, and not any more than that, for the house since other goals will require funding: Case study: how a family in their mid-30s with a newborn kid can FIRE and invest in real estate?.
We will exclude the case where the primary residence is purchased after retirement.
Case 2: Very near to FIRE and other goals are separately funded
Here the investor has made significant progress towards their FIRE goal, as well as others like college education, and are now thinking about buying a house. Here there are two options:
- Option 1: stay on rent until Coast FIRE is reached (case 3 below)
- Option 2: spent some of the already accumulated corpus for house down-payment which implies a big chunk of the investible surplus should now be diverted to EMIs
Related:
Sec 54F: a hack that can save lakhs in taxes when you buy a house
Case 3: Reached Coast FIRE but still need income for non-FIRE goals
Coast FIRE is reached when the corpus you have is enough to grow on its own to reach the target value on its own
For example, you need ₹5 crores for retirement starting 5 years from now. You already have ₹4 crores which can easily grow to ₹5 crores in 5 years without any further contributions from the investor.
Related:
What is CoastFIRE? How to achieve CoastFIRE in India?
Therefore, once you reach Coast FIRE, you need income only for day-to-day expenses, travel, and other lifestyle expenses, as well as your kids’ education goals. You also don’t plan to FIRE in the next say 5 years. This is the right opportunity to buy the house. Your long-term goals will not be affected by the purchase as explained here: What happens to your mutual fund portfolio final value if you choose to buy a house?.
You may not also need a large down-payment depending on the property you purchase: How to Buy Your Dream Home Without Any Savings: A Step-by-Step Guide.
Case 4: Reached Coast FIRE and other goals are funded
This is the best-case scenario where your major goals are in the funded and you can therefore divert a large chunk of your investible surplus into the house. You can even buy a second house for investment purposes if your first house is already paid for: How to buy a second house which is a luxury property?.
The target here will be to pay off the home loan for the new house before FIRE starts. We have covered this concept here: Should you consider paying off your home loan faster in your 40s or 50s?.
Related Articles
- What happens to your mutual fund portfolio final value if you choose to buy a house?
- How to buy a second house which is a luxury property?
- What is CoastFIRE? How to achieve CoastFIRE in India?
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This post titled When should you buy a house if your goal is FIRE or early retirement? In your 30s, 40s or 50s? first appeared on 15 Dec 2024 at https://arthgyaan.com
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