If you’ve been following any finfluencer, you probably already have a good understanding of FIRE (Financial Independence, Retire Early). So, why am I even writing about this? Cause I love the history and math behind FIRE and thought I will shed some light on it for your benefit!

The FIRE movement is believed to have started in 1992, when authors Vicki Robin and Joe Dominguez used this term in their book ‘Your Money or Your Life’. The movement basically propagates the idea of cutting expenses and making investments in such a way to help individuals quit the 9-5 job they probably hate.

How to calculate

Here’s the most important thing about the concept of FIRE. It states that one needs to accumulate 25x their yearly expenses to retire right away! One needs to also withdraw 4% of the FIRE amount yearly to sustain himself/herself. Let’s try to understand this with an example:

Let’s say I need Rs 50,000 for my monthly expenses, yearly that’s Rs 6 lakh per annum. Hence, I would need Rs 6 lakh x 25 = Rs 1.5 crore to retire today!

Yes, it’s not Rs 100 crore like you may have imagined it would be!

Let’s move to the next part of it, that’s withdrawing 4% of your FIRE corpus yearly. In fact, 4% of this Rs 1.5 crore is Rs 6 lakh itself. So, according to this, if Rs 1.5 crore is sitting in your wardrobe, it should last you 25 years right?

Wrong, inflation will eat it up. How long this money will last depends on how you have invested it.

• Firstly, it needs to be invested in such a way that it beats inflation.
• Secondly, to last longer than 25 years, it needs to earn higher returns than inflation itself. Ideally, 10-12% returns is the sweet spot. This can be achieved through an Equity Glide Path Method. I’ll definitely write a post on that some day.

Also Read: 10 Tips to Cure Empty Wallet Syndrome

A caveat in FIRE

Finally, there is a caveat in FIRE which concerns the kind of lifestyle you can maintain with your FIRE number. Well, you need to maintain the same lifestyle and expenses that you used to calculate the corpus amount. Else, there will be shortcomings.

Now, this post explains FIRE in the context of retiring today. But realistically, many of us do not have such a huge corpus lying around. One needs to plan their investments to plan a FIRE corpus. This is where incorporating inflation into your calculation plays a major role.

With time, expenses increase and also inflate. Although my expenses are Rs 6 lakh today, 10 years down the line, due to inflation, it is going to be higher.

Read my next post in FIRE series tomorrow where I explain how we can accommodate inflation while calculating FIRE!

Still confused? Don’t worry, The 1% Club can help you understand how to reach your retirement goals faster than others. See details here

Disclaimer: The above content is for informational purposes only. Please consult a SEBI-registered investment advisor before investing in market-linked instruments