Are You Thinking About Joining The FIRE Movement?
Jun 28, 2019

Author: Divya Grover

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(Image source: freepik.com)

Don't you wish to pursue your hobbies and passion, or start your own business, and/or travel the world, etc., when you retire from a regular job or illustrious career?

But what if you retire after the age of 60 and feel too old to do any of those things?

Many people want to retire early and this is why millenials in the West are advocating the Financial Independence, Retire Early (FIRE) movement.

FIRE is a movement that promotes the idea of tremendous saving and investing so you can retire earlier than traditional savings and investment avenues will allow.

The idea originated out of the 1992 best-selling book, `Your Money or Your Life', by Vicki Robin and Joe Dominguez. The book correlates expenses to the time spent at work, specifically to earn a particular purchase.

Broadly, the investments that you have made can be withdrawn in small amounts post retirement to fund your daily expenses. The trend is gradually catching up in India too.

[Read: Wish To Live Life King Style When You Retire? Read This!]

But an early retirement is not as easy as it seems. To follow the FIRE movement, you will have to scrutinise your expenditure and increase savings substantially.

And the first step is deciding the age you plan to retire and the amount you will require, depending on the desired lifestyle, after retirement.

[Read: Want To Retire Rich And Travel The World? Read This!]

Once you have decided the amount required to fund your retirement, you can calculate the amount you need to save every month. With your time horizon being lesser than the conventional retirement year, traditional retirement schemes like bank fixed deposits, national pension scheme, and public provident fund may not be the vehicles that will get you to your retirement corpus destination.

To retire early, investing in mutual funds will be your best bet because they have the potential to generate higher returns in the long-term. Furthermore, there is a mutual fund for almost every need and risk appetite, across equity and debt categories.

Most importantly, you must understand the risk-return potential of the mutual funds you choose for your retirement plan as well as post-retirement goals.

[Read: Thinking Of A Blissful Retirement? Here's Why You Can't Ignore Investing In Mutual Funds]

Retiring early means there will be a longer number of years after retirement. That is why the corpus required and the monthly savings you need to make will be higher.

To illustrate this point, let's take these two scenarios as examples:

Scenario 1 - Current age: 25 years; Retirement age: 60; Retirement corpus required - Rs 10 crore

How much you will need to save every month: Rs 15,395 (assuming annual expected return of 12%)

Scenario 2- Current age: 25 years; Retirement age: 45; Retirement corpus required- Rs 20 crore

How much will you need to save every month: Rs 2,00,170 (assuming annual expected return of 12%)

[Read: Why Starting Young to Plan Your Retirement Works!]

Basically, to achieve your early-retirement corpus, follow an aggressive approach and invest in equity mutual funds.

Remember, your investments can be diversified across various market capitalisation like large, mid, small, and multi-cap funds to get the different benefits that each fund offers.

Mid cap and small cap funds have the potential to generate higher returns as compared to large cap funds, but the risk involved in the former funds are higher. By investing in large cap funds, you add an element of stability to your portfolio.

To mitigate the risk/s involved in equity mutual fund investments, you can opt to invest via Systematic Investment Plans (SIPs). Investing through SIPs will help you reduce the cost of investment over time and grow your wealth through the power of compounding.

[Read: Best SIPs To Invest In When Planning For Your Retirement]

To accelerate reaching your retirement corpus goal, you should increase your contribution towards SIP when your income increases. This will work as a booster to your wealth and counter inflation.

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There is also a solution-oriented mutual fund scheme for retirement planning called the `Retirement fund'. This scheme has a lock-in period of five years or till retirement age, whichever is earlier. Since it comes with a lock-in period, you will be unable to exit the scheme if it underperforms. Therefore, you need to carefully assess every fund before you invest in it.

Things to keep in mind if you are planning to retire early

If you are young with lesser responsibilities, you can afford higher savings. However, your circumstances may change in the future and it might become difficult to save as much. This could become a hurdle to your early-retirement corpus.

Therefore, along with your current circumstances, take into consideration your ability to achieve your retirement goal in the future. Make sure that your other financial goals are adequately taken care of, which includes having a substantial contingency reserve and medical and life insurance covers in place.

Adopting the FIRE movement is not for everyone. It involves discipline, delayed gratification, and sacrifices made in the present for future success. Additionally, many things could go awry on the path to achieving your retirement goal.

On way to check this is reviewing the performance of your portfolio periodically to determine if you are on the right track.

Anything that gets you to save and invest for the future can be seen as a positive sign. Take a dose of inspiration from the FIRE movement to plan your personal finances and empower you to be ready for the future, even if you are not planning to retire early.

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