Tag: income

‘Freedom to retire early’ — the biggest aspiration of the BL Portfolio Survey respondents — strikes a chord with the ‘FIRE’ or ‘Financial Independence, Retire Early’ movement in the US.

At its core, ‘FIRE’ is all about building a nest egg and hanging up your boots much before the traditional retirement age. We take a closer look at this trend.

What is it

The origin of FIRE is vaguely traced to the 1992 book ‘Your Money or Your Life’ by Vicki Robin and Joe Dominguez. The book encourages one to reassess one’s relationship with money, pointing out that ‘we are sacrificing our lives for money, but it is happening so slowly that we barely notice’. Salary/money is something that an individual earns for time spent. Having a clear understanding of relationship with money would ensure an optimum trade-off between time and money (implying, money earned which in turn gets spent or saved).

The FIRE movement, which started gaining traction soon after the global financial crisis of 2007, requires following a disciplined approach of saving aggressively and starting to invest from a young age in a prudential manner.

Proponents recommend even saving as high as 75 per cent of one’s income to retire very early. The objective is to reach a level of savings that will yield sufficient returns in the form of dividends, interest income or rental income with which one can meet living expenses comfortably. At this point, one has the freedom to choose whether one wants to work, or take up only gigs that give one happiness or are in sync with one’s passion.

Some withdrawal from the capital ie the principal amount can also be factored to meet living expenses. This, however, comes with risks in today’s world where average life span is getting extended, and one should not run the risk of falling short of financial resources at a later stage in life, when one might not be able to work.

Ideal corpus

Based on current living standards and investment return prospects in the US, those in the FIRE bandwagon there follow something known as the ‘4 per cent rule’. One’s total yearly living expenses is multiplied by 25; if it is possible to earn a 4 per cent annual yield on that from investments, then one can quit their job, according to their mantra. A yield below 4 per cent with rest withdrawn from principal also might be fine, according to some proponents, since some of the corpus might appreciate over time, but this comes with risks.

When it comes to planning for a similar objective for a FIRE aspirant in India, two important factors imply the multiple applied to yearly living expenses may need to be higher than 25 — high inflation and low yields.

India has historically had much higher inflation than the US, which means one’s savings erode faster over a period of time. India goes through periods of negative real interest rates (inflation higher than interest rate) like in the last year, denting the real income of retirees preferring safe investment options. Hence, a yield of higher than 4 per cent may be needed on savings.

Besides, rental yields and dividend yields in India are much lower than that in developed markets (Nifty 50 dividend yield at 1 per cent versus Dow Jones Index dividend yield at near 2 per cent). Hence, focussing entirely on capital appreciation and withdrawing from principal to make up for the lower yield presents a risky proposition, warranting a higher multiple to yearly expenses.

Hence, other factors such as frugal living and wise investing may be required to get this dream of early retirement closer to reality.

Takeaways

Finally, if you want to be on the FIRE bandwagon, here are three things that you can do, which also form the core of the FIRE movement:

One, spending only on what is essential — not indulging in excessive consumerism and thereby devaluing your own effort. It was your effort that earned you the money and spending that money without much thought devalues the effort. Tempering down on consumerism also comes with positive consequences for the environment which appears be a cause important to millennials.

Two, saving wisely — investing in a prudential and judicious manner that can grow your corpus optimally and also give you comfort, confidence, and peace of mind .

Three, valuing the time that you spend at work — when one realises that money is a by-product of how one spends his/her time, then one gets more conscious of making use of that time more productively. Following the first two principles would help you choose a job you may like. At the same time, when you realise that your savings and spends which will help you reach your goal is a function of your time at work, you will also begin utilising that time more effectively.