This webapp allow you to calculate the FIRE amount based on you expenses, inflation across different category, your current saving, rate of returns on your investment, etc., and calculates an investment corpus you would need to retire. It also provides the monthly investment required to attain the desired corpus. The goal of this tool is to help reduce ambiguity surrounding the FIRE corpus calculation and help people achieve or have plan to achieve their Financial Independence goal. The webapp creates an unique URL allowing you to share your FIRE plans with others for review or feedbacks.
This website uses the approach of storing data locally in the browser and within the URL ensures user privacy and control over their information. This method allows for immediate processing and rendering of data without the need for server-side storage or processing. It's a privacy-centric design that prevents the sharing of user data with third parties, aligning with the growing demand for data protection and user autonomy in the digital space.
The F.I.R.E. stands for Financial Independence, Retire Early. FIRE refers to the idea of accumulating a financial nest egg that is large enough to support your living expenses for the rest of their lives without the need for active work. Being Financially independent (FI) give you the ability to decide how you want to spend your time and retiring early (RE) is one of the outcome which can originate from being FI.
Achieving Financial independence requires meticulous financial planning, including budgeting, expense tracking, and strategic investment into income-generating or expense reducing assets. Better planning helps remove ambiguity around the approach towards FIRE and give confidence to make the better financial choices. At minimum it inspires individuals to reevaluate their financial habits and work towards a future where they have more control over their time and choices.
One of the popular strategy for calculating the corpus required to achieve FIRE (FIRE amount) is the 4% rule. The idea of the 4% rule is that you withdraw 4% from your investment corpus in the first year of your retirement and then adjust for inflation and withdraw thereafter. With this the 4% rule recommends you can calculate your FIRE amount by simply multiplying your annual expense by 25. Though this gives a good starting point but it's not one-size-fits-all solution. The FIRE amount could vary depending on personal circumstances such as if you own resources which generate passive income, your life expectancy, your lifestyle inflation, the amount you want to leave as inheritance, etc., could widely change the amount from person to person.
Inflation: Money loses value over time and the purchasing power the money use to hold diminishes in long run. For example, with 10% yearly inflation the cost of goods will double every 7 years. So unless the money that you have saved also grows with inflation you won't be able afford the things you were able to afford 7 years back.
Though Consumer Price Index (CPI) is a good starting point to track the inflation but the inflation percentage may widely vary based on the personal preferences, location, quality of goods we consumer, services we rely on, etc., For example, imported fruits may see a different increase in price compared to local grown fruits, so a person preferring imported fruit may experience the cost increase differently than a person preferring local grown fruit. Similarly, each category such as travelling may see a different inflation when compared to increase in school fees.
Averaging the inflation across different category would also not yield the right results as category depending on how much amount is spend and what is the inflation the amount would get skewed in the long run. For example, Person-A and Person-B spends 500 every month on Movie Tickets which increases 15% yearly and Groceries which increases 5% yearly.
Person-A spends 400 on Movie and 100 on Grocery to maintain the lifestyle after 5 years, Person-A would need to spend 804 on the movie and 127 on the Grocery, making the total spend of 931. If Person-B prefers spending 100 on Movie and 400 on Grocery, after 5 years Person-B would be spending 201 on the movie and 510 on the Grocery, spending a total of 711. Even though both started the same monthly spend and the same inflation, but to the preferences Person-A would ended up spending 220 more than Person-B.
Though the inflation and the initial total amount spent were the same, the personal preferences and category inflation would skew the results. Not accounting for this while calculating the FIRE amount would result in wrong value impacting the FIRE journey.
Diversification: Diversification of investment is important as it helps to spread the risk across different asset classes, industries, and geographic regions and created a cushion against the unpredictable nature of the economy. Key reasons why diversification is important -
Reduce unsystematic Risk: Diversification help reduce risk associated with a specific industry or assert class. For example, if you only invest in the real-estate and if real-estate market suffers a downturn due to covid like situation, then you would be exposed to significant risk. Diversifying helps mitigate this risk.
Balanced Returns: Different asset classes generally performs differently under different economic circumstances. In a diversified portfolio, if one asset is underperforming the other might be doing well. This would help stabilize the returns over time.
Lower Volatility: As a diversified portfolio spreads the risk across different segments, it tends to have fewer extreme swings . Making the portfolio reliable and risk-averse.
Passive Income: Passive income streams like rental properties or royalties provides a steady flow of income without the need for active involvement. This can help reduce the overall amount you need to save for retirement.
Margin of Safety: Margin of Safety(MOS) is a percentage why which the actual expense exceeds the calculated expense. MOS acts as a cushion against the error in calculation, accounting for the unexpected, volatility, etc.
Expense planning: Expenses can be divided into three category
Lifetime Expenses - which would consist basic living expenses purchasing food, medication, etc., and any personal expenses which are expected to be carried throughout the lifetime.
Short-term Expenses - which would end after some time. For example, spending on children education or saving for college, etc.
One time big Expenses - list of big ticket items such as purchasing a house, going on a world tour, etc.
Post retirement investment allocation: To reduce the risk of volatility or unexpected events investors must move their fund into a low risk bucket which may have low returns but it would secure the short term expenses and a high risk bucket which could yield higher returns in the long terms.