I am 25 and want to FIRE by 40. How much should I save per month?
This post shows a worked-out example for someone starting their career to plan for FIRE.
This post shows a worked-out example for someone starting their career to plan for FIRE.
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:
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.
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
Using the online Goal-based Investing calculator with these assumptions leads to
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.
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.
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.
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.
The table shows that:
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?.
At all times, ensure that you have the following in place
and once you start investing,
This article discusses how to plan early retirement in the face of lifestyle inflation and lack of health insurance for an investor in their 40s.
Published: 8 December 2024
7 MIN READ
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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