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 the traditional retirement age
There are a few more nuances regarding the income and lifestyle levels at the time of FIRE.
Definition by income
We recap the various types of FIRE to check your current progress towards FIRE.
CoastFIRE: You have accumulated enough as a FIRE corpus so that you do not need to invest further for traditional retirement. For example, your retirement target is that at age 58, you need a corpus of ₹5 crores and will stop working. If you have accumulated enough money by age 50, which will grow to ₹5 crores in the next eight years, you are now CoastFI. You can use this post to check your progress here: Goal-based investing will show you how much you should have saved at 30,40,50 and retirement
BaristaFIRE: You wish to FIRE but have not accumulated enough. You plug the gap from the income from the FIRE portfolio via a scaled-down career. For example, your target lifestyle is six lakhs/year for FIRE, while your corpus can only generate five lakhs/year. You take on a job that produces the difference. The name comes from having a part-time job like a barista at a coffee shop to plug the gap
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: Minimalism focused lifestyle at an expense level a lot lower than the present. A typical way to do this is to utilize 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
Is FIRE only possible for some people?
If you look at the FIRE stories around you, on social media and in other places, you will see a general trend in FIRE aspirants:
location: outside India, mostly either in the US or Western Europe
industry: in IT or software development or related fields, usually in large product companies
wealth level: relatively on the high side relative to age
These stories present a misleading picture that if you do not fall in one of these buckets, then FIRE is not possible to achieve in your case. There are a couple of points to note here:
self-selection bias: while there might be many people who are interested in the concept of FIRE, the vocal ones are from this particular group
reaching FIRE depends not on income but on investing to get to the FI stage. We will discuss this point further
Other misconceptions and criticisms
Money’s greatest intrinsic value—and this can’t be overstated—is its ability to give you control over your time - Morgan Housel
The above quote is one of the pillars of the concept of FIRE. If you are targeting to either Retire Early (RE) or go for Financial Independence (FI) or both (fully FIREd), you are essentially giving out a message to the world that:
you wish to gain complete mastery over your time
you hope to be able to utilize money as a tool to do that
you want to structure your life in a way that you can do what you want to do if earning money is not the only objective
These three points together counter a few common misconceptions about FIRE:
you only live once or YOLO: there is no point in postponing today’s enjoyment for an uncertain tomorrow by investing everything today to reach FI
by deciding to RE, you are choosing laziness at home over a life of honest labour at your day job
We discuss these two points below.
YOLO vs conscious spending
We use the twin super-powers of Pay-yourself-first and Conscious Spending to get over the YOLO barrier.
Pay-yourself-first says Expenses = Income - Investments, i.e. spend after you have invested. To reach this state, you need to sit down with your family and decide your spending priorities. It essentially means having a similar conversation like setting financial goals. Once you have started investing for your FIRE goal and then spending on discretionary items that have been appropriately prioritized, you are on the fast track to FIRE. We explain the process below.
Housing costs and vehicles are the most significant line items in any household budget. However, over-spending on home loans and car EMIs can significantly divert money from other goals. This is where prioritization comes in. You and your family need to decide on your primary lifestyle:
Case 1: a small rented apartment in a high-cost location, short commutes, premium schooling, small car or public transport, regular long-weekend vacations
Case 2: a large house in a low-cost suburb with more peaceful surroundings, a big family car, one extensive foreign tour every couple of years
The options above will not only require spending different amounts of money every month but will create different types of memories and experiences. It is up to you to choose which one you prefer.
Smaller items
These items are more frequent but tend to add up over time. This is called the Latte Factor.
The Latte Factor was popularized by author David Bach. The concept is simple. Small amounts of money spent on a regular basis cost us far more than we can imagine - [Source: Forbes.com: ‘https://www.forbes.com/sites/robertberger/2017/05/27/the-latte-factor-7-key-lessons-we-can-learn-from-a-cup-of-coffee/’]
It would help if you prioritize your spending on discretionary items like this:
do you care about gadgets vs eating out
do you want to spend more on shopping for clothes vs movies
Investment is made first, and this includes both FIRE and non-FIRE goals. Non-FIRE goals will consist of emergency and sinking funds and other goals like children’s education and house purchase. The best way to de-risk the other non-FIRe goals is to ensure that these goals are funded before FIRE starts.
Whatever is remaining after investing goes into the monthly spending bucket, which is split as:
mandatory items like rent, food, EMI, utilities
prioritized discretionary items (e.g. Entertainment and Travel in this example)
if anything is left, then that goes into other discretionary spending (e.g. Gadgets and Clothes in this example)
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Laziness vs spending time with a purpose
FI will let me do my morning stand-ups sitting down. - Author
Jokes apart, it is pretentious to assume that FIRE candidates wish to sit under a tree lazing around the whole day while their non-FIREd contemporaries are trading off their time for money. This is an excellent time to mention this particular quote:
The price of anything is the amount of life you exchange for it - Henry David Thoreau.
As we have discussed in our previous post on the concept of the hourly wage, we trade our time for money by spending a good chunk of time every day for generating income. Therefore, the hourly wage calculation is the rate of the same: income per hour.
Achieving FIRE, specifically FI, flips that equation around by using our investment corpus to buy the freedom of choosing to spend time as we wish. If the career is fulfilling, people can and do continue. Others will shift to a different type of role, profile, industry, art, business or shift to something part-time. The options are endless and even includes the option of doing absolutely nothing. That is where the freedom part comes in to have a purpose in life beyond just earning money via a job or profession.
Here is a fact: unless you work until the day you die, you will retire eventually, which is a certainty. Whether you do it before your mandated retirement age or not is entirely up to you. Many professionals (like doctors and lawyers) keep working until their 70s or later. But just because you can, there is no reason to assume that you must. It is a choice. Hence retirement planning, early or not, needs to begin from the day you start earning money. Remember that you cannot take a loan for retirement.
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. 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.
It’s a marathon, not a sprint - Attribution pending
The line above is overused and cliched but appropriate to the problem at hand. For a few months or a year, you can cut out discretionary and other spending to bump up your savings rate. But that is where the YOLO fear kicks in once your motivation to deprive yourself, relative to your peers and others, runs out.
For example, when faced with a large goal, many people often set up large and unrealistic targets. If you are planning to lose 10Kg weight, do not make unrealistic plans like one mean a day or going to a gym for 6 hours/week. There will be more benefits from sustainable actions. Similarly, if you plan for FIRE in ten years, start with a savings rate that you can maintain consistently for the next ten years.
Savings rate sensitivities
The savings rate, 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
We will use the RRTTLLU framework to evaluate the investments suitable for a FIRE portfolio. Unlike a traditional retirement portfolio, the FIRE portfolio, due to the RE part, will have to last longer and will have higher sensitivities to the starting assumptions regarding returns and inflation.
Real returns i.e. returns after inflation and liquidity of assets, will become critical factors in evaluating suitable investments.
What asset classes you should have in your FIRE portfolio
A FIRE portfolio should have the following asset classes:
cash for immediate expenses, sinking fund and emergency fund
income assets for generating medium-term income like bonds, bank deposits, debt mutual funds and government schemes. Here is the complete list.
The split of these three asset classes, i.e. the asset allocation of the FIRE portfolio, will be decided using the calculator in the post below: How to plan for FIRE using the bucket approach?
Some recommended exclusions for a FIRE portfolio
These investments are not suitable for a FIRE portfolio:
NPS: due to lock-in up to age 60 followed by compulsory conversion to an annuity of 40% of the corpus. If your money is locked until 60, you cannot FIRE. Also, an annuity is taxable at slab rates and is not inflation-indexed. Capital gains are more tax efficient.
Real estate: investment in real estate for price appreciation, not rental income, is not recommended for a FIRE portfolio. There is no guarantee that the property can be sold at the desired price at the right time for use. Rental income sounds excellent on paper but finding and keeping tenants and growing the rent with inflation is not easy. Rental income is taxed at slab rates, and there are considerable expenses associated with a rental property for maintenance and taxes
Gold in any form: Gold is not an income-generating asset. While diversification and attempts to beat are incentives to include gold, there will be limited impact unless gold is included at a large allocation level which will compromise returns as explained here: What is the best way to invest in gold?
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This post titled What is the quickest way to reach FIRE? first appeared on 20 Feb 2022 at https://arthgyaan.com
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