A Step-by-step guide for finding out how much money you need to FIRE in India.
What is the net-worth needed to FIRE in India?
Posted on 03 Apr 2022
Author: Sayan Sircar
15 mins read
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A Step-by-step guide for finding out how much money you need to FIRE in India.
📚 Topics covered:
- Net worth for a FIRE portfolio
- Step 1: Location and inflation
- Step 2: FIRE lifecycle
- Step 3: Sustainable savings rate
- Step 4: Investment plan
- Step 5: Plan review
- A worked out example
Net worth for a FIRE portfolio
FIRE is defined as:
FIRE = FI (Financially Independent) + RE (Retired Early)
FI = you do not need income from a job or profession since your investments generate enough to sustain your lifestyle
RE = retiring early before traditional retirement age
We have covered the rationale of pursuing FIRE at length in this post: What is the quickest way to reach FIRE?. In the context of creating a portfolio that allows you to FIRE, there is the obvious question that how much is enough. The corpus you need to accumulate is a function of your target lifestyle, savings rate and the time left. The net worth for FIRE is defined as:
Net Worth = Assets - Liabilities
Assets: shares and bonds, mutual funds, investments, gold, houses etc Liabilities: loans of any kind (home, personal, gold, education etc), credit card balance
We need to subtract loans from asset values since while you are paying off a loan, your portfolio value is reducing. It is also important to add a liquidity filter to the above definition of assets since when you are in FIRE you need assets that either generate sufficient income like stock dividends, bond coupons, rental income or enough capital gains due to price increases that you can use to live off. A portfolio of plots, apartments and houses that do not generate sufficient income should be excluded from FIRE calculation simply because you cannot convert that into cash to live off.
In this article, we will show a step-by-step way to arrive at your FIRE networth that is easy to implement and also ensures that your FIRE plan is successfully so that you do not run out of money mid-way.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.
Step 1: Location and inflation
Where you decide to live in FIRE will play an important role in figuring out your target corpus. The general rule is determining your quality of life (QOL) vs. the cost of living (COL) as per location:
- quality of life: better, similar, minimal vs. your current lifestyle
- cost of living: high, medium or low (HCOL/MCOL/LCOL)
The first parameter i.e. QOL is a personal choice. The lifestyle you want to have once you FIRE impacts the time it will take to reach the target. There are three kinds of FIRE:
- LeanFIRE: A minimalism focused lifestyle at an expense level a lot lower than the present. A typical way to do this is to utilise geographical arbitrage. You earn and live in a High Cost of Living (HCOL) Area where income is high and FIRE in a Low Cost of Living (LCOL) area where housing and living costs are lower. A good example is NRIs coming to India to retire or residents shifting from Tier 1 cities to Tier 2/3 locations during FIRE
- FIRE: This is the middle path with the exact lifestyle cost as the present without spending significantly lower or higher
- FatFIRE: This type of FIRE involves very high planned expenses relative to the present and requires an exponential increase in wealth, either from business or inheritance, for example, to achieve this state
The second parameter which is COL is shown below with some examples.
Cost of living (COL)
The table below shows monthly living costs for a family using data from Numbeo as well as real estate price trends using data from 99acres to give you an idea of costs in major cities. This excludes around ₹10-15,000/month of daycare and ₹10-30,000/month of school fees.
|City||Family of 4||Single person||Rent 3BHK||Buy 1,250 sqft flat|
You can use a template like this to figure out the expenses in the FIRE period: How can you figure out your expenses in retirement/FIRE?
Role of inflation
The concept of inflation needs to be applied to all of your goals: how much do you think the goal will increase in cost every year in the future. It would be best to beat this figure, including the investments you make and the returns you get.
Important: CPI/WPI figures from the government are different from actual inflation applicable to your lifestyle. You should be in a position to calculate the changing cost of your basket of goods and services consumed under major budget heads on a year-on-year basis.
Some inflation assumptions:
- For retirement, assume 8-10% inflation and start tracking the price increase of your bucket of goods and services. Add an estimate for travel and healthcare (~12%) as well
- College education: Foreign countries have low price inflation but high education inflation and will vary from country to country. E.g. UK can have 6% education inflation.
- Travel and vehicle purchases are common goals. Assume 8-10% inflation here as well.
Review goals at least yearly to figure out the current prices of your goal (the change since the last review will indicate the inflation)
Other goals: children and travel
There is an additional level of complexity if you consider paying for goals like children’s education/marriage as well as goals like regular foreign travel. If you do not have income, you are effectively at the mercy of stock markets. You can reduce your exposure to market fluctuations by using our goal-based investing calculators here or here but the fact remains that once you have FIREd, you should have saved for other goals already and kept them safe in non-risky assets. For example, if you need ₹1 crore for a child’s higher education in 8 years and you decide to FIRE today, then the present value of that 1 crore should be in a fairly safe debt mutual funds at the point of FIRE. If we assume that the fund will return around 3% after tax over 8 years then you need to invest 100/1.03^8 = 79 lakhs in the debt MF today when you FIRE.
- How should you invest for goals after your retirement or FIRE?
- Do you need to pay for children’s education or marriage?
Step 2: FIRE lifecycle
There are three parts to this question since you need to determine much time is there:
- before you reach Financial Independence (FI)
- from FI to Retiring Early (RE). This stage might be very short in case you are planning to RE immediately after FI
- how long will the corpus last in RE
Step 3: Sustainable savings rate
Reaching FIRE depends not on income but on investing to reach the FI stage - Author
If you are explicitly targeting FIRE, it becomes a different type of goal. While we all know that compounding is magical, specifically while reading How compounding works: the journey to a 10 crore portfolio, it works best when you have time at your side. Unfortunately, suppose you wish to FIRE 5-15 years before your normal retirement age. In that case, you do not have the luxury of time to compound your portfolio.
The conclusions to be drawn from the compounding formula, when applied to a FIRE candidate, are:
- you do not have control over the returns you will get. This is universally true
- time is not on your side
- you have control only over the quantum of investments you can make
The bottom line here is that you need to invest a lot and the only way to do that is by investing at a rate that you can maintain from today until FIRE. As a FIRE candidate, you need to fix a target savings rate that works and keep investing every month until you reach your FIRE target.
Step 4: Investment plan
We will plan this in three stages:
- Accumulation stage: this is just like regular retirement planning with a short horizon
- FI stage: here you may not immediately RE. An option is to continue with your full-time career or switch to a part-time profession that pays less. The latter is called BaristaFIRE where you do small part-time work that brings some income but the heavy lifting is done by your FIRE corpus
- RE stage: at this point, there will not be any active income
The accumulation stage will have the same approach as anyone saving for retirement with two important changes:
- the time horizon will be less compared to traditional retirement at 60
- the savings rate will be a lot higher than retirement at 60
- all your other goals like children’s education, marriage, down-payment/EMI of a house must be funded in this stage
If you are taking a home loan, the EMI should be completed before this stage ends.
Please review this detailed article on how to construct your portfolio in the Accumulation stage: I am 25 and want to FIRE by 40. How much should I save per month?
On the other hand, if your income increases steadily or there is a windfall gain, say from a rich relative or sale of real-estate, you might reach a stage where there is no need to invest more. At this point, the corpus you have is enough to grow on its own to reach the target value on its own. This is the concept of CoastFIRE.
This stage is an intermediate stage where your expenses may be fully funded by your FIRE portfolio, as per the definition of FI, but you may not choose to RE immediately. You can plan this using the method described in this post here: How do you get SIP amount for early retirement.
We are not a proponent of the Safe Withdrawal Rate (SWR) approach for managing the FIRE corpus since we believe that SWR leaves too many things to chance and cannot be demonstrated to work for India due to lack of data
We use a modified version of the bucket theory of portfolio construction by creating 3 buckets: cash, debt and equity for each year in the RE stage. We believe that applying goal-based investing along with risk management via an appropriate glide-path per goal of yearly expenses maximises the chances of successfully completing the RE stage.
Please review this detailed article on how to construct your portfolio in the RE stage: How to plan for FIRE using the bucket approach?
Step 5: Plan review
The following needs to be done in this order every year:
- find the new corpus which is the sum of the current value equity and debt fund values
- review the goal parameters (new horizon is 1 year less, review the current cost of the goals to adjust for actual market inflation etc.)
- re-balance between the equity and debt fund values
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
Once you start investing,
- perform yearly review and rebalancing as per your glide-path
- never interrupt compounding by making these avoidable mistakes
A worked out example
We assume a family with the following goals:
- Accumulation stage of 15 years from age 35 to 50, 40k/month expenses in FI stage target, 50L house purchase at the beginning of the FI stage (fully paid off)
- FI stage of 5 years from age 50 to 55, 60k/month expenses in RE stage target, 20L child education goal to start the beginning of FI stage i.e. 15y from now
- RE stage of 40 years from age 55 to 95
The monthly expense figure is calculated at the beginning of this 15+5+40 = 60 year period and will be inflation-adjusted by 7%. We will use the comprehensive goal-based investing calculator to derive the monthly investment assuming 25 lakhs of current corpus and 10% increase in investments every year. There will not be any income in the RE stage and in the FI stage there will be 20k/month income using a variation of BaristaFIRE which accounts for the gap in spending in the FI and RE stages.
The family will have to create
- a SIP of ₹1,94,033 where ₹1,16,420 will be in equity and ₹77,613 will be in debt assets
- the existing 25 lakhs corpus should be rebalanced to be 15 lakhs in equity and the rest in debt
- the SIP should be increased by 10% per year at least
- the family should have ₹5 crore of total term insurance coverage at present
- the total corpus should be ₹12 crore at year 15 when house, college education, and FI goals kick in
- the total corpus should be ₹13.56 crore at year 20 when RE starts
The total SIP amount comes to almost 2lakhs/month of which ₹1.16 lakhs is in equity and the rest is in debt. The SIP amount will have to be increased by 10% every year based on annual portfolio review. This amount looks very large but look at what you are getting:
- inflation adjusted goals for all goals including lifestyle expenses until age 95
- fully paid off house and college degree for child
- 5 years of FI and 40 years of RE starting at age 50 onwards
If the amount looks unachievable for the time being, you can start small and adjust your goals along the way.
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Case study: how can this middle aged investor with two children plan for retirement and children's goals?
This article shows how a single-income middle aged couple with two small children reach their retirement and children’s goals.
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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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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)
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Topics you will like:Asset Allocation (20) Basics (8) Behaviour (10) Budgeting (11) Calculator (17) Case Study (6) Children (12) Choosing Investments (38) FAQ (6) FIRE (13) Gold (11) Health Insurance (4) House Purchase (17) Insurance (15) International Investing (10) Life Stages (2) Loans (9) Market Movements (13) Mutual Funds (29) NPS (6) NRI (13) News (9) Pension (8) Portfolio Construction (46) Portfolio Review (27) Reader Questions (6) Real Estate (6) Retirement (36) Review (12) Risk (6) Safe Withdrawal Rate (5) Set Goals (27) Step by step (14) Tax (37)
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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