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I am 25 and want to FIRE by 40. How much should I save per month?

Posted on 24 Aug 2021
Author: Sayan Sircar

Tags: Retirement ; FIRE

7 mins read
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This post shows a worked-out example for someone starting their career to plan for FIRE.

How to estimate SIP amount for FIRE

📚 Topics covered:

Introduction
Calculate your FIRE expenses and get the first estimate
Effect of increasing income vs FIRE expense
Effect of changing the time horizon before FIRE is achieved
Effect of increasing the savings rate
A note on having the prerequisites in place

Introduction

This post is an extension of our previous post on FIRE calculation with a specific focus on someone who has just started earning, has heard about the Financial Independence, Retiring Early (FIRE) movement and wants to FIRE as early as possible.

Achieving FIRE (or more specifically Financial Independence) does not necessarily mean that the investor does not need to work. Rather it gives the flexibility to choose the type and quantum of work as per their own choice.

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If you are a FIRE aspirant, it is advisable to plan for goals like children’s education and other post-FIRE goals separately as explained here.

The key drivers for FIRE are:

Increasing and high income: higher the income and growth of income, the more you can invest every year
High savings rate: the less you spend monthly frees up more to invest and simultaneously lets you FIRE earlier

We will cover all these factors in this post using the following tools:

We will be using the SIP increment percentage (how much the SIP increases every year until FIRE) as a proxy for both drivers.

Calculate your FIRE expenses and get the first estimate

These are the expenses in the first year of FIRE in today’s money. A good way of calculating this is using this FIRE expenses estimator.

Let us say that the FIRE expense figure and related assumptions are

six lakhs as first-year expenses estimated using this post
7% inflation both before and after FIRE
five lakhs as lump-sum available to invest today
15 years to achieving FIRE (at the age of 40)
40 years in FIRE (until the age of 80). Given that the human lifespan is increasing, we may need to choose a longer longevity figure here
5% increase in yearly investment for the next 15 years
Risk profile is moderate (60:40 equity and debt allocation for goals > 15 years away: see this for details)
11% and 3% as long term returns (post-tax) of equity and debt respectively

Using the online Goal-based Investing calculator with these assumptions leads to

Setup a SIP of ₹ 1,07,080 per month, of which you should invest ₹ 64,247 in equity and ₹ 42,833 in debt. This SIP amount will have to be increased by 5% yearly as a step-up SIP to stay on track
You need to invest the five lakhs lump sum amount as three lakhs in equity and two lakhs in debt today
The goal value of ₹ 240 lakhs (six lakhs x 40 years) will be inflation-adjusted by 7% to reach a value of ₹ 617 lakhs. In 15 years, this will be the corpus you need to reach or the value of the “FIRE corpus.”

Here your “FIRE multiple” is 617 / (6 * (1.07 ^ 15)) or 37 times the expenses in the first year of FIRE.

Let us now look at the sensitivities of income growth rate and savings rate on achieving the FIRE corpus.

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Effect of increasing income vs FIRE expense

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FIRE corpus Sensitivities - increasing income

This table plots a simple sensitivity of increasing income (modelled by a fixed increase in investment rate) vs expenses in the first year of FIRE. For easy comparison, the starting corpus, when investing starts, is assumed to be zero. We see, for example, that with six lakhs expenses 15 years from now, the SIP is ₹ 55,210 with a 10% annual increment. If the yearly increment is 12%, you need only ₹41,343 per month to invest. This example shows how critical it is to increase your income and savings rate in achieving FIRE.

Also read
What is the latest Employees Provident Fund (EPF) rate? What are the historical rates for EPF?

Effect of changing the time horizon before FIRE is achieved

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This table shows the target corpus values for various yearly expenses and the SIP needed to reach it, assuming 10% SIP growth. For example, if the FIRE target date shifts from 15 to 17 years, then the SIP amount changes from ₹ 55,000 to ₹ 49,000 per month with the same assumptions on retirement and equity and debt returns as before and 40 years post FIRE. For easy comparison, the starting corpus, when investing starts, is assumed to be zero again.

Effect of increasing the savings rate

The savings rate (=Income - Expenses), together with the amount already invested for FIRE in terms of the current annual expenses, together will impact the time left to FIRE. In the example below, we assume a 10% yearly income increase, 5% inflation, 5% long term returns (i.e. zero real returns) for the FIRE portfolio and 4% annual withdrawal rate. Success is defined as the corpus lasting at least 30 years.

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The table shows that:

if your income is ten lakhs and you are investing four lakhs a year (40% savings rate), the time to reach FIRE varies from a maximum of 24 years (no current savings) to 15 years if 30x the current expenses are saved as FIRE corpus
if you increase your sustainable savings rate, the time to FIRE reduces
if you are starting from a higher capital base, the time to FIRE reduces

Read more on savings rate here: What is the quickest way to reach FIRE?.

At any point you can find out how much progresss you have made using this post: How long will your money last if you retire today?.

A note on having the prerequisites in place

At all times, ensure that you have the following in place

An emergency fund with 6-12 months of expenses
A term insurance policy (unless you are retired with no income)
A health insurance policy (separate from the company-provided one, if any) for 10-15 lakhs as a base policy with a 50-100 lakhs super-top up
A personal accident insurance coverage to safeguard against accidents where you do not die but cannot earn
No high-interest debt like credit card or personal loans

and once you start investing,

perform yearly review and rebalancing as per your glide-path
never interrupt compounding by making these avoidable mistakes

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Retirement FIRE

How can you figure out your expenses in retirement/FIRE?

This post shows an easy way to estimate your expenses in retirement/FIRE as the first step in knowing how much you need to target as a retirement corpus.

Published: 23 August 2021

8 MIN READ