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In today’s times, people are looking to retire early in their 40s or 50s when they are at the peak of their careers. A lot of people are talking about FIRE which is “Financial Independent, Retire Early”. While some people can be ‘FIRE-d’ up due to family priorities or sudden illness or even job layoffs, many individuals are actively choosing to retire early to choose alternative career paths or to pursue something that aligns with their value system.
Retiring early means you need to support your family for the next many decades. For instance, if you are retiring in your 40s, you will need to have a corpus that would be sufficient for the next 40-45 years assuming the average life expectancy of an individual is 80-85 years. This means that whatever investments or savings you have made in your working years needs to be such that they supports your living expenses, and goals such as children’s education, children’s marriage, and your retirement.
Choosing FIRE also means that your money needs to work harder than you as it needs to protect your purchasing power as well as grow faster to support your retirement timeline.
As a result of this choice, an early retiree may need to invest his/her savings in assets where the compounding rate is higher than the inflation rate. Equities as an asset class could be a choice for such investors. however sometimes, it could also be a cause of anxiety, in times when markets are volatile.
As amazing as it sounds to retire early and have financial independence, let us examine if FIRE which is “Financial Independent, Retire Early” suitable for everyone.
- An early retiree may have to mercilessly cut his expenses to boost savings rate and help achieve FIRE. However, in this process, there could be lots of trade-offs such as not spending on some present-day needs and this may create some angst. Disciplining oneself would be a tough journey.
- To retire early, one may need to do a side hustle during the working years, so as to achieve a retirement corpus early. However, this process can cause burnout as one is under constant pressure to achieve that targeted corpus.
- Once in retirement for a few years, an individual could realize that he/she needs to go back to work, but it may not be easy to re-enter the workforce, as the individual is now in an older age group.
- Finding an optimal withdrawal rate from the investment portfolio for supporting expenses is tricky, if you withdraw too much, your corpus is depleted, and if you withdraw too less, you will take fun out of the retirement. Hence, an individual may need lots of financial planning and may need to reach out for advice and appropriate asset allocation.
- FIRE people could find retirement boring after some time, as their professional identity has been cut down, although many of their peers still continue to work. Not having a purpose and a clear plan on what you want to achieve in retirement can be challenging.
- Combining your early retirement goal with other goals like children’s education and marriage could impact your entire finances and may force you into adopting a different timeline for early retirement. Planning ahead would be crucial.
The myth about FIRE is that people think that once they have a corpus, they can just quit their 9-5 jobs. Once they have quit, they will take some time off and look to pursue some alternative career paths or freelance or take up part-time assignments. The points above suggest the contrary.
However, the most important questions an individual needs to ask before choosing FIRE is
“How will I spend my days in retirement?”
“What do I want to achieve in my retirement years?”
“Will I be okay if this is my ideal day-to-day routine?”
“How much will I need financially to support all this?”
Discipline, financial planning, clear thinking, and investment planning will be the keys to a successful transition into being financially independent and retiring early. Plan Ahead if FIRE is what you seek.
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I retired when 57 yrs old. Apartfrom all that is listed, I had 2 advantages.
1. Married early and had children early. They were well settled a few years before my retirement.
2. During woeking life, I invesred one by one in 4 flats through bank loans. I got tax benefits while working assured rental income when I retired.
Thanks Mr. Ayyar for your inputs on planning for retirement.