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FIRE! How much do you need to retire today? January 12, 2021

Posted by Ragesh G R in Unleashed.
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FIRE! That is Financial Independence and Retire Early is a buzz word in the last few years. It means amass a high enough corpus of wealth such that you are not compelled to work anymore. One can still work or pursue their passions of course, but even if one stops working today, this corpus would be enough to sail you through the rest of your years.

Now, this is not a thorough calculator but a quck back of the envelope kind of worksheet to help us gauge the ballpark number required to retire.

For this we need some inputs:

M – Monthly expense at the time of retirement (which will persist throughout the retirement. So child school fees etc can be avoided)

E – Yearly expense. Basically M*12

N – Number of years you expect to live once you retire (Yup! 😦 we need some assumptions on this too)

g – Growth rate of the corpus. May be you have invested this corpus in a Debt Mutual Fund or FD or something that grows without much volatility

w – Increase in withdrawal rate. You start withdrawing your yearly expense from the corpus but the yearly expense will also increase due to inflation and other reasons

Finally, Corpus – C – the money we need to amass by investing

The simplest formula for C is:

C = E*N

That is. The corpus needed is Annual Expense at the time of retirment * Number of Years left to live off the corpus after retirement.

This is assuming that your expense inflates at the same rate as the corpus grows. Assuming you live for 30 years after retirement, If your corpus of 30X is invested in an instrument which grows at 6% a year, then:

Withdraw X in year one

Withdraw 1.06X in year two

Increase withdrawal by 6% every year (same rate as the corpus growth) and corpus will become 0 at 30th year. This is because. Assume corpus invested in a 0% return instrument and you withdraw a static X every year. Then obviously the corpus will last 30 years right? Similarly if we increase the withdrawal by the same % as the corpus grows then corpus will last 30 years regardless of your withdrawal rate as long as it is equal to corpus growth rate.
On the same note, if you want your corpus to last 40 years, then you need 40x

Example: 1 lac is the monthly expense. So yearly E is 12 lac. So to live 30 years in FIRE, you need atleast 3.6 crore rupees. This is assuming expenses increase just at the rate of corpus growth.

Have attached the excel as well. below:

https://rageshunleashed.files.wordpress.com/2021/01/fire-1.xlsx

You can play around with the yellow numbers. I have assumed growth rate and withdrawal increase rate as 6%. But doesn’t matter as long both rates are same. You can tweak that in the formula and increase withdrawal rate etc. You can try for various values N, M, g and w.

Another question is. How to calculate E. If you wanna retire today you know E. If you wanna retire say 10 years later then: E” = E*(1.06^10). That is about 1.8E

If your expense is one lac a month. Your expense after 10 years will be 1.8 lac a month. Then question might arise, what about lifestyle expense inflation ? Well feel free to increase the withdrawal growth rate w more than corpus growth rate g. You will need more than 30X then.

You can key in investment growth rate (g). Withdrawal growth rate (w). Here I have used an approximate formula that X = N*w/g. That is for example for the same 35 years scenario, if investment grows at 6% and withdrawal grows at 8% then you need 48X and so on. And of course I re iterate this is back of the hand calculation for ball parking minimum FIRE corpus. Don’t use this as investment strategy or a final retirement calculator. That’s why in case of FIRE better be on the side of caution. If you plan to live 30 years, 40X would be a good buffer to aim for. Whether we achieve even 20X, well that’s another question. But atleast we can work towards it. Of course there are more accurate methods by using bucket system where not all is invested in a conservative vehicle.
But yes, this is the back of the envelope intuitive ballpark calculation: Annual expense AT THE TIME FOR FIRE multiples by number of years you will live in retirement, at the very minimum.

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Posted by Ragesh G R in Unleashed.
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