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.
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Calculate your FIRE expenses and get the first estimate
These are the expenses in the first year of FIRE in todayās 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
Setup a SIP of ā¹ 1,07,080 per month, of which you should invest ā¹ 64,247 in equity and ā¹ 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 ā¹ 240 lakhs (six lakhs x 40 years) will be inflation-adjusted by 7% to reach a value of ā¹ 617 lakhs. In 15 years, this will be the corpus you need to reach or the value of the āFIRE corpus.ā
Here your āFIRE multipleā 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
(click to open in a new tab)
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 ā¹ 55,210 with a 10% annual increment. If the yearly increment is 12%, you need only ā¹41,343 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
(click to open in a new tab)
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 ā¹ 55,000 to ā¹ 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.
(click to open in a new tab)
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
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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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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
