FIRE Method: A Guide to Retirement

Financial Independence, Retire Early (FIRE) is a movement of people devoted to a program of extreme savings and investment that aims to allow them to retire far earlier than traditional budgets and retirement plans would permit. (Investopedia)

The concept was inspired by a book titled “Your Money or Your Life” which was written by Vicki Robin and Joe Dominguez in 1992. The followers of the FIRE movement are people committed to extreme saving and diligent investment while hoping to quit their job in their early 30s or 40s to live the rest of their life solely on small discipline withdrawals from investment portfolios. Followers of this movement consider this not as an idea but as a way of life. It is a concept built around an idea of self-sufficiency, moderate consumption, control over one's time, and freedom from the 9-5 rat race. While there is a 3 step process to apply this method there is much more to it, that needs to be dealt with. A few of the questions need to be asked yourself; How much income is needed to sustain the lifestyle in early retirement?  How soon do you want to retire?

Before diving into the process of FIRE and answering the above-mentioned questions, we need to know about the rule of thumb of retirement withdrawal strategy i.e. 4% rule, which suggests that retirees can safely withdraw the amount equal to 4% of their savings each year during retirement and then adjust for inflation each subsequent year for 30 years. For example, if retirement fund = RS 5 CRORE, Spendable fund=20 LAKH (4% of 5 crore).

Another rule is also available regarding retirement withdrawal strategy which is known as the Inverted 4% rule which is used to identify required retirement funds. For example, if required spendable fund after retirement= 20 lakhs, retirement fund to be allocated= 20lakhs*25= 5crore).

Is 4%adequate or not? is always a simmering debate. what we do is, calculate money to ensure that you don't run out of money during your retirement year. The 4% rule was established on several assumptions in the USA which mayn't be true today and are not applicable in a country like Nepal. Assumptions are it is likely to work reliably for 30 years which makes it inappropriate for FIRE devotees wishing to retire early and assumptions like the portfolio will grow at an average of 7% per year. So, we can make our own rule like 4% including inflation.

Method of FIRE technique goes as follows;

1) Save Aggressively: The FIRE technique suggests saving as much as possible also while specifying a rate of 50%-70% which is much higher than any financial advisor advises. While doing this might not be possible for everyone, the idea is to get as close as possible to those rates. Also, it can be done through a boost in our income through part-time jobs, pay hikes, changing jobs, reskilling oneself, side hustle, etc.

2) Spend Wisely: Indicating to live frugally or living like a student as said by a famous entrepreneur Mark Cuban, is an essential action for FIRE devotees. Individual needs to identify what is essential and what expenses can be tagged as discretionary. Tips under this action are; driving a used car, using public transport, renting a house, cooking yourself, avoiding going out, avoiding credit card debt, etc. FIRE community also gives major emphasis to passive income of different kinds like Dividends, Interest from fixed deposits, Blog income, social media AD revenue, etc. Passive income is something FIRE members are continuously striving for and the FI ratio is also used to calculate the level of progress towards financial independence.

                        FI RATIO= PASSIVE INCOME/EXPENSES

Anything above 100% means some good progress towards financial independence.

3) Invest Wisely: The FIRE community states the importance of investing as early as possible and as much as possible. It requires fire followers to give one's money the best chance of growing. It's done through low-cost index funds or exchange-traded funds to do that investing job effectively. In the case of Nepal, it can be done through SIP and through NEPSE-50 which is supposed to be introduced in our market. The focus here is on participating in the market rather than beating the market.

Looking at the global scenario there's something that's fueling the FIRE movement, which could be millennials and Gen-Z looking beyond bland financial advice. Young people are advocating the FIRE movement as a new rule book, where people can live their life on their terms. Here, when the word 'RETIRE' is used, it is not to indicate that they have stopped working but it is to indicate that they have happily retired to something else that they love. While it's not quite easy to achieve and people get bothered by the idea that FIRE requires you to sacrifice too much of now, even though FIRE practitioners say that their new lifestyle is deeply gratifying.

By Suman Dhakal

(Dhakal is a student at Prithvi Narayan Campus, Pokhara.. You can reach me him at linkedIn.)