Personal Finance

How To Retire Early Using The FIRE Method?

FIRE method to retire early

In recent years, the trend of planning to retire early has caught the imagination of millions of people across the world, predominantly the millennials. Many who wish to retire early have started adopting the ideas of FIRE (Financial Independence, Retire Early) that originated in the US and spread across the globe, inspired by the 1992 book Your Money or Your Life by Vicki Robin and Joe Dominguez.

Key Takeaways:

  • The basic concept of FIRE is the rule of  extreme saving and investment 
  • The objective is to retire early by starting to save as early as possible to create a corpus that is sufficient to take care of the retired life
  • Even if some of the methods are a bit too much to practice, some methods can help you advance your expected retirement age

What is the FIRE method?

FIRE is a method of rules where people adopt extreme saving methods to have financial freedom earlier than the conventional retirement age of 60-65 years. While early retirement is a major goal for some Fire followers, it is more about building a savings and investment that will give financial freedom and flexibility in post-retirement life, such as working part-time or freelance or not working at all. 

It seems to have gained more appeal during the pandemic; 52% of Americans plan to quit full-time jobs before 65 years and the trend is becoming popular among people across regions, including India.

The steps to follow to retire early, with or without applying FIRE principles

Estimate the need: The first step you need to take when starting to plan to retire early is to estimate the money that would be required to take care of the needs of you and your dependents, once you retire. You will have to factor in the basic expenses such as housing rent or EMI, food, clothing, utilities, transportation, insurance, and healthcare. One factor that you have to note here is that you ideally enter retirement free of all debts, whether be housing loan, credit card outstanding, or any kind of loan or outstanding bills. If there are still any liabilities outstanding when you retire, that amount must be included in your budget. Add discretionary expenses including those for entertainment, travel, leisure, and hobbies. A total of all these items will provide you with a view of how much you will need each month to maintain the retirement life you wish. 

Calculate the required savings: Once you have estimated your monthly spending, the next step is to calculate how much money you need to save. One of the approaches to do this is to have a saving amount between 25 and 30 times your expected yearly expenses plus the cash to cover contingency, say one year's worth of expenses. Assume your monthly expenses will be Rs. 50,000—or Rs. 6 lakh per year, you will need between Rs. 15 lakhs and Rs. 18 lakh plus Rs. 6 lakh in cash to retire. Another approach is to divide your estimated annual expenses by 3-4%, which in the above example will give an estimate ranging between Rs. 15 lakh (Rs. 600,000 ÷ 0.04) and Rs. 20 lakh (Rs. 600,000 ÷ 0.03). .

Save extremely: Early starters have an advantage of the power of compounding and time horizon. It helps you save frequently and extremely by putting aside 25% to 50% of their income every month. Saving at this level will need you to identify indispensable expenses and make some lifestyle changes to adjust to the expense cut. You can follow money-saving tricks and decide where to put your savings. 

Invest intelligently: You must have the estimated corpus when you retire not only in absolute value but also in real value. Poor investments will not only give low income but will also erode the value of your investment by inflation. You need to invest your savings in products that grow your money. fMost Fire savers create a portfolio of investments that can meet your goals with minimum risk. 

Earn more and spend wisely: Saving alone won’t be enough to achieve the goal. You may have to boost your income to pursue extreme investing early on, which may require you to find other sources to earn additional income if your existing income is not enough for the amount of investment required to meet your goal. It is critical to manage instant gratification and avoid spending on luxury items to save fast. That might mean delaying or resisting instant gratification. 

The big question

It may be a trend to retire early these days, but you don’t have to just follow it blindly. Ask yourself, if you want to retire early. If yes, why do you want to retire early, and when? You must convince yourself with the answers to these questions, before you plan for early retirement, whether through the adoption of the FIRE method or other methods. 


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Published on
December 22, 2022
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