This FIRE involves investing – what’s it?

You may be aware of this concept, but let’s start with understanding what the acronym FIRE means in personal finance and investing.

FIRE – Financial independence, retire early.

It simply means adopting a lifestyle where one saves more than usual to achieve financial independence at an earlier-than-usual age, which can help one retire early.

So how does one go about it?

Traditionally, those in the workforce typically worked up to the maximum permissible age. This not only kept them in the workforce, and thus, earning for longer, but also helped cut down on their retirement period.

This has, though, seen a change in recent years, with people preferring to save and invest in their early years of employment in a manner which helps them retire early because they no longer need to earn to support their lifestyle.

To start with, one needs to know the amount or corpus they need to retire early. This is often referred to as the ‘FIRE number’.

One needs to take into account their current expenses and factor in the impact of inflation. A simple rule generally followed to figure out this corpus is by multiplying annual expenses by 25. However, one also needs to make changes in this as needed depending on the age they retire, and other expenses, including any wealth distribution they may have in mind.

Another thumb rule that people keep in mind for following a FIRE lifestyle is that they must withdraw 4% of their retirement corpus annually to allow the corpus to sustain for a 30-year period.

The important thing for fire is that individuals need to save a relatively large chunk of their regular income consistently, and the earlier it is done, the better it is because it helps one benefit and gain from compounding.

The disadvantage?

Not everyone may have enough disposable income to save at least half of it. Managing your lifestyle with lower expenses is also not something that may be agreeable to everyone.

The advantage?

You can start enjoying your retirement earlier!

 

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