This post shows a worked-out example for someone starting their career to plan for FIRE.
I am 25 and want to FIRE by 40. How much should I save per month?
Posted on 24 Aug 2021
Author: Sayan Sircar
7 mins read
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This post shows a worked-out example for someone starting their career to plan for FIRE.
📚 Topics covered:
- 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
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.Join the Arthgyaan WhatsApp community: You can stay updated on our latest content and learn about our webinars. Our community is fully private so that no one, other than the admin, can see your name or number. Also, we will not spam you.
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
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.
Effect of changing the time horizon before FIRE is achieved
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.
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,
What's next? You can join the Arthgyaan WhatsApp communityYou can stay updated on our latest content and learn about our webinars. Our community is fully private so that no one, other than the admin, can see your name or number. Also, we will not spam you.
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This article shows how a double-income couple with a 2-year old reach their FIRE dream at the age of 50.
This article shows how a double-income couple with a newborn child can invest for their future goals of FIRE and real-estate investment.
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This article shows how a young just-married couple can invest for future goals using the Arthgyaan goal-based investing tool.
Did you welcome a bundle of joy in your 40s? This article will discuss ways of planning the child’s (and your’s financial future)
This article shows how a very typical salaried couple with one child can invest for future goals using the Arthgyaan goal-based investing tool.
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Topics you will like:Asset Allocation (20) Basics (8) Behaviour (10) Budgeting (11) Calculator (17) Case Study (6) Children (14) Choosing Investments (40) FAQ (7) FIRE (13) Gold (14) Health Insurance (4) House Purchase (21) Insurance (15) International Investing (10) Life Stages (2) Loans (13) Market Movements (17) Mutual Funds (34) NPS (6) NRI (15) News (10) Pension (8) Portfolio Construction (47) Portfolio Review (27) Reader Questions (6) Real Estate (6) Retirement (38) Review (13) Risk (6) Safe Withdrawal Rate (5) Set Goals (27) Step by step (15) Tax (43)
1. Email me with any questions.2. Use our goal-based investing template to prepare a financial plan for yourself
use this quick and fast online calculator to find out the SIP amount and asset allocation for your goals.
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