Arthgyaan

Supporting everyone's personal finance journey

What is the quickest way to reach FIRE?

If you are interested in FIRE, you need to know about the best way to reach that goal. This post shows how.

What is the quickest way to reach FIRE?


20 Feb 2022 - Contact Sayan Sircar
15 mins read

If you are interested in FIRE, you need to know about the best way to reach that goal. This post shows how.

What is the quickest way to reach FIRE?

Table of Contents

What is FIRE?

Defining FIRE

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

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.

  • CoastFI: 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 58 and a corpus of 5 crores. If you have accumulated enough by 50, that 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
  • BaristaFI: 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

Use this simple FIRE calculator to estimate your progress towards FIRE: How to plan for FIRE using the bucket approach?.

Definitions by lifestyle

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.

Recent articles:
1 / 3
<p>This article shows a way to decide what to do when stock markets reach all-time or lifetime highs. Should investors buy more or sell to book profits?</p>
The stock market has reached an all-time high. Should you buy or sell?
2 / 3
<p>This article uses the Arthgyaan Have vs Needs Framework to invest a large lump sum amount in your portfolio per your financial goals.</p>
How to invest a lump sum amount for your goals?
3 / 3
<p>This article shows you how the concept of indexation lowers the capital gains tax you pay when you sell debt mutual funds.</p>
Pay lower capital gains taxes for debt mutual funds: understand how indexation works

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.

Pay-yourself-first is described in more detail here: How to budget, save and invest in a stress-free manner?

Big-ticket items

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
  • or any other combination that you want

This way, you can spend more money on what you care about and cut down on those items you do not. Related reading: How Goal-based investing lets you do guilt-free spending

Implementing in practice

(click to open in a new tab)
FIRE expense flowchart

Here is how income is handled:

Step 1

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.

Read more here:

Step 2

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)

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.


Goal-based-investing plan

Achieving balance by the sustainable savings rate

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.

Compounding formula

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.

Why does it have to be sustainable

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)
Sustainable Savings Rate Example

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

To calculate your progress towards FIRE, use the comprehensive goal-based investing calculator.

What goes into the FIRE portfolio

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.
  • growth assets to beat inflation. This should be in equity mutual funds.

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?

These investments are not suitable for FIRE:

  • NPS: due to lock-in up to age 60 followed by compulsory conversion to 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?
If you liked this article, consider subscribing to new posts by email by filling the form below.

Worked out case studies for goal-based investing

Previous and next articles:

<p>A home loan is a multi-year commitment to your cash flows and changes your risk profile. So how should you change your income and investing?</p>
Risk Loans House Purchase
How does your risk profile change with a home loan?

A home loan is a multi-year commitment to your cash flows and changes your risk profile. So how should you change your income and investing?

Published: 15 February 2022

14 MIN READ


<p>What should you do if there is a fall in your NPS corpus just before retirement at 60? This post details the problems and shows how to remediate the risk.</p>
Retirement NPS Risk
The unknown risk in NPS that few people talk about

What should you do if there is a fall in your NPS corpus just before retirement at 60? This post details the problems and shows how to remediate the risk.

Published: 24 February 2022

9 MIN READ


Latest articles:

<p>This article shows the effect of postponing early retirement by just a little since it allows you to spend more in retirement.</p>
FIRE
FIRE journey in India: what happens if you work just a bit longer

This article shows the effect of postponing early retirement by just a little since it allows you to spend more in retirement.

Published: 4 December 2022

2 MIN READ


<p>This article shows a way to decide what to do when stock markets reach all-time or lifetime highs. Should investors buy more or sell to book profits?</p>
Market Movements
The stock market has reached an all-time high. Should you buy or sell?

This article shows a way to decide what to do when stock markets reach all-time or lifetime highs. Should investors buy more or sell to book profits?

Published: 30 November 2022

4 MIN READ


Topics you will like:

Asset Allocation (17) Basics (8) Behaviour (10) Budgeting (9) Calculator (13) Case Study (3) Children (9) Choosing Investments (28) FAQ (3) FIRE (10) Gold (6) Health Insurance (4) House Purchase (13) Insurance (12) International Investing (8) Life Stages (2) Loans (10) Market Movements (8) Mutual Funds (14) NPS (5) NRI (4) News (5) Pension (6) Portfolio Construction (36) Portfolio Review (22) Retirement (29) Review (7) Risk (6) Safe Withdrawal Rate (5) Set Goals (26) Step by step (8) Tax (16)

Next steps:

1. Email me with any questions.

2. Use our goal-based investing template to prepare a financial plan for yourself
OR
use this quick and fast online calculator to find out the SIP amount and asset allocation for your goals.

Don't forget to share this article on WhatsApp or Twitter or post this to Facebook.

Discuss this post with us via Facebook or get regular bite-sized updates on Twitter.

More posts...

Disclaimer: Content on this site is for educational purpose only and is not financial advice. Nothing on this site should be construed as an offer or recommendation to buy/sell any financial product or service. Please consult a registered investment advisor before making any investments.

This post titled What is the quickest way to reach FIRE? first appeared on 20 Feb 2022 at https://arthgyaan.com


We are currently at 206 posts and growing fast. Search this site:
Copyright © 2021-2022 Arthgyaan.com. All rights reserved.