Vasant G Hegde CFA, former banker and teaching at Manipal Academy of Higher Education, Bengaluru.
Narayana Murthy has triggered a debate in India, urging young Indians to work 70 hours a week to enable the country to compete with bigger economies. But elsewhere, a movement gaining traction is more about retiring early to pursue one’s dreams and hobbies or alternate vocation, enjoying the simple pleasures in life. It’s all about attaining financial nirvana , exiting a possibly toxic workplace and other pressures of the 9-to-5 grind.
FIRE
‘Financial independence, retire early’ (FIRE) as a concept was introduced by Vicki Robin and Joe Domingue in 1992, in their book titled “Your Money or Your Life”. The gist of the book is that in a more-is-better world where individuals chase money on a perennial treadmill clearing debts and living on income month to month, we should learn to get off the treadmill, take time off to appreciate that life is more than just making money be aware of how and where we are spending our money. FIRE is about achieving financial freedom.
It involves investing your savings regularly from an early age so that individuals can retire early before the typical retirement age of 60. The benefits of retiring early are that you can spend more time with your family and friends, eat healthy food, exercise regularly & live a stress-free life without having to worry about money.
How do we achieve this?
Deciding when to retire is a difficult choice for all of us. The first step to achieving financial independence is to track your spending and understand where the money is going. This can help you cut down on unnecessary expenses and help you save more. This does not mean that you have to be a miser and lead a frugal life. For example, instead of buying a new or fancy car because your neighbour has a swanky car you can buy a used car. Buy a mobile handset or a watch based on their utility value not to make a fashion statement. The sooner you start investing the better because you are giving money more time to grow. When you save more you can invest more in assets that can generate income during your retirement phase. Also, make sure that you choose your investments based on your risk tolerance & time horizon. On the income side, you can increase your income post-retirement by hustling or doing part-time work.
How much is enough?
This depends on how much you need every year near post-retirement. Suppose you need Rs 6 lakhs per year, as per the rule of 25 you multiply 6 lakhs by 25 which means you must have Rs 1.50 crores. Rule of 25 covers retirement expenses for 25 years. If you retire at 60 the corpus should cover you till 85. But if you want to retire at 40 or 50 then you need a bigger corpus. The biggest drawback with the rule of 25 is that it does not consider inflation. The other rule is the 4% rule which was developed by William Bengen in the early 1990s. This rule suggests that you can safely withdraw 4% of your portfolio’s value in the first year of retirement and if adjusted for inflation, the fund can last for 30 years. This is a simple thumb rule but events like huge unforeseen medical expenses and higher-than-expected inflation can derail the plans.
The FIRE movement will appeal to individuals who do not enjoy the conventional “9 to 6 till 60” template. FIRE is irrelevant for those who enjoy their work and see no reason to retire. Even for those retiring early, they must consider many aspects carefully and have a concrete plan about how they want to spend the post-retirement years because 24 hours in a day is a long time and boredom can set in early after retirement. Boredom can trigger depression & other related health issues.