FIRE as a movement has increasingly grown in popularity
among the millennial of the west. FIRE is the abbreviation for “Financial
Independence, Retire Early”.
This trend is gaining further traction because freedom from
the shackles of “work for living” existence allows an individual to chase
his/her passion. Who wouldn't agree that creativity and innovation blossoms where
the mind is without fear and the time is our own.
But how to reach there?
The proponent of the FIRE movement suggest the “4% rule” as
a guide. It is another name for “ Trinity study”, an influential 1998 paper
submitted by three professors for finance at the Trinity University. The study
was to determine the “safe withdrawal rates” from the retirement portfolios containing
a mix of stocks and bonds.
The 4% refers to the portion of the portfolio that is withdrawn
during the first year. If that amount cover the yearly expense of the retiree,
it is assumed that the person has sufficient assets to last for 25 to 30 years.
The market volatility and increase of the consumer price index (CPI) to keep
pace with the cost of living has been factored in a reasonable way.
This was back-tested by the authors and several other researchers
and found to be workable. However, we need to note that the tests has been
conducted based on historical data and no one know how the markets are going to
perform in the future.
This is a very interesting notion Suman. I must admit, it is the first time I have heard of FIRE in this order :). I would certainly be the person who would like to retire early, but just got to ensure that there is a good cushion to bank on before I do that :)
ReplyDeleteYes Vinay.. I believe that is a dream of every man and woman. Dhaval Bhatia of 7R theory said in TED that he doesn't have to work any longer. What he has already created are working for him and generating income for him while he does what he likes. There are only a fortunate few who could retire early from active work but one has to go for it.
ReplyDeleteEven by simple math if our yearly expense is 4% of our asset it will last for 25 years if you just dig your bucket and take out the years expense. At 40 years of age that takes you till 65. Then you will still be doing something these 25 years and so will your assets.
Any income in excess to that will stay behind.... so whats the point.
Sit back and relax albeit easier said than done.
Thanks for stopping by.
Yes, I agree. Investment is a very good art and science. Although I am a far long distance away, I would be very interested and curious to know how to make this work for my benefit. Having been on the side of needing money at more than a few places, it will be good to switch sides and be in a place where resources are less scarce :)
DeleteWe are a emotional lot and tend to attempt to solve everything all at once. There are others who are able to break targets into bite size pieces and keep moving forward!
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