Want to retire early but don’t know how? Here’s how to work out your FIRE number

However, many aspirants struggle to calculate their ‘FIRE number’ – the amount they must accumulate to never have to work again. The calculation is complex because it has several moving parts. Expenses rise each year, sometimes in line with inflation and sometimes faster. The corpus also earns returns, which must be accounted for.

Here is a step-by-step guide to calculating your FIRE number, and a rule of thumb.

The rule of thumb is deceptively simple. If you wish to retire today, the corpus you need is your current yearly expenses multiplied by the number of years you expect to live. For example, if you spend ₹10 lakh a year and you expect to live another 50 years, you must have ₹5 crore saved up. On the face of it this number appears to ignore inflation – the increase in prices over time. However, in reality, this tends to be offset by the returns from the corpus over time.

Also read: How this Darjeeling-based coder seeks financial independence with ₹15-crore corpus

You may be familiar with the popular 4% withdrawal rule, which says a retiree should be able to withdraw 4% of their corpus in the first year after retiring, and then withdraw the same amount, adjusted for inflation, every year thereafter for about 30 years. This translates into a corpus that’s 25 times your annual expenses. But how do the calculations work?

Step 1: Calculate your annual expenses

The first step in a FIRE calculation is to estimate your annual expenses at the point of retirement. If you plan to retire immediately, these are your current annual expenses. If not, you need to adjust your expenses for inflation. For instance, ₹10 lakh in annual expenses now translates to about ₹18 lakh in 10 years.

Step 2: Map out your inflation-adjusted expenses

List the expenses for each year you expect to spend in retirement in an Excel sheet, increasing them by the assumed inflation rate.

Also read: How this biker is riding on the road to financial freedom

Step 3: Estimate your returns

Estimate the long-term rate of return on your savings. For instance, with a traditional 60:40 portfolio (60% in stocks, 40% in bonds), if you expect equities to deliver 12% in the long run and debt to deliver 7% you will arrive at a weighted average growth rate of 10%.

Step 4: Estimate the growth of your corpus

Estimate your corpus using the thumb rule above and increase it for each year by the assumed rate of return. For each year, deduct the expenses you estimated in step 2. You will arrive at a net growth figure for your corpus. This amount will be positive through most of your retirement because the return on the corpus will greatly exceed your annual expenses. However, expenses will eventually exceed the return and your corpus will start to deplete. In case the initial corpus value you have imputed falls short, keep adjusting it so that it falls below zero only after the age of 90.

Also read: Three steps to ensure you have enough money when you need it

“The rule that your retirement corpus should be your current annual expenses times the number of years you will be in retirement broadly holds. If the retirement period is very long, for example 60 years (for someone retiring at 30), you require less than 60x, as for such long periods equity compounding offsets the annual expenses. When the retirement period is shorter, say 20 or 30 years, you need slightly more than 20x or 30x. For retirement periods of 40 or 50 years, you broadly need 40x or 50x,” said Ravi Saraogi, a Sebi-registered investment advisor and co-founder of Samasthiti Advisors.

It’s important, however, to build in a significant buffer as you’re likely to face several unexpected events over a multi-decade period. Inflation could be higher than expected or a market crash could reduce your returns. If you’re not sure how to do this, do consult a Sebi-registered investment advisor.