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


24 Aug 2021 - Contact Sayan Sircar
7 mins read

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

How to estimate SIP amount for FIRE

Table of Contents

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.

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 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.

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.


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Effect of changing the time horizon before FIRE is achieved

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FIRE corpus Sensitivities

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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Sustainable Savings Rate Example

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?

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 sinking fund for insurance payments (health, car) and known recurring expenses (building maintenance, holiday travel etc.)
  • a term insurance policy as long as you have 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
  • no high-interest debt like credit card or personal loans

and once you start investing,

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Asset Allocation (18) Basics (5) Behaviour (10) Budgeting (9) Calculator (10) Children (6) Choosing Investments (24) FAQ (2) FIRE (8) Gold (6) House Purchase (10) Insurance (6) Life Stages (2) Loans (10) NPS (3) NRI (3) News (5) Portfolio Construction (27) Portfolio Review (17) Retirement (20) Review (7) Risk (6) Set Goals (24) Step by step (3) Tax (10)

Next steps:

1. Email me with any questions.

2. Use our goal-based investing template to prepare a financial plan for yourself
OR
use this quick and fast online calculator to find out the SIP amount and asset allocation for your goals.

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This post titled I am 25 and want to FIRE by 40. How much should I save per month? first appeared on 24 Aug 2021 at https://arthgyaan.com


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