Over the last few years, the Financial Independence, Retire Early (FIRE ) movement has gained momentum in India and many other parts of the world. Some FIRE aspirants prefer to retire and live on passive income. On the other hand, some people focus on the financial independence aspect of FIRE and not the retire-early part. Financial independence gives them the freedom to work on their passion on their own terms. The FIRE concept originated in the US and works on a set of assumptions that are more suited to US markets. In this article, we will discuss why the original FIRE model may be unsuitable for Indian market conditions and how you can customise it to suit your needs.
What is the FIRE concept?
The FIRE concept involves accumulating a corpus equal to 25X of annual spending and investing it. It assumes withdrawing 4% of the corpus at the start of the first year. In subsequent years, the annual withdrawal amount is adjusted for inflation every year. The annual inflation rate in the US hovered around the 2-3% average for a long period. The remaining corpus remains invested and grows in line with market performance. The corpus is expected to last 25 years.
The above FIRE concept has been tested under US market conditions and is therefore suited to the US market. However, in India, the market conditions are very different than the US. Hence, the US FIRE model cannot be applied directly in India.
Why can the US FIRE model not be applied directly to India?
Some of the reasons why the US FIRE model cannot be applied directly in India include the following:
Inflation
Over the long term, the annual inflation rate in the US has averaged between 2% and 3%. However, in India, over the long term, the annual inflation rate has averaged between 5% and 7%. So, if an Indian investor makes annual withdrawals from their FIRE corpus at a 5% to 7% inflation-adjusted rate, the corpus will be exhausted sooner than a US investor who makes annual withdrawals at a 2% to 3% inflation-adjusted rate.
Social security and healthcare
In the US, individuals have access to the Social Security programme, which provides a monthly income to retired individuals. In India, individuals have to build their retirement fund through Public Provident Fund (PPF), National Pension Scheme (NPS), mutual funds, etc. However, because these programmes are voluntary and not mandatory, few people invest in them.
In the US, individuals have access to public healthcare programmes such as Medicare and Medicaid. In India, people have to manage their own health insurance. Hence, the healthcare penetration is low. Even among people with health insurance, coverage for many of them is inadequate.
If the individual has to fund the healthcare expenses out of pocket, from the FIRE corpus, it can exhaust the corpus earlier than expected.
Stock market volatility
The Indian stock market has historically been more volatile than the US stock market. During specified events, the Indian stock markets experienced significant drawdowns. For example, during the subprime crisis, the Indian stock market fell around 60% from its peak. Similarly, during the COVID pandemic, the Indian stock market fell around 40% from its peak.
Suppose an Indian investor deploys the FIRE corpus into equity mutual funds, and a major correction hits the stock market during the early years. In such a scenario, NAVs will be lower, and as a result, the individual will redeem higher units to fund their retirement expenses. Redeeming a higher number of units will lead to the FIRE corpus getting exhausted earlier than expected.
Customisation of FIRE model to suit your needs
In India, individuals can customise the FIRE model to suit their needs. Some of the ways to do that include the following.
Factor in a higher inflation
The US FIRE model considers a 2% to 3% inflation rate. However, as inflation is higher in India, you should consider a higher inflation rate of 5% to 7%. It includes core inflation and lifestyle inflation.
Plan a bigger retirement corpus
The US FIRE model considers a corpus of 25X the annual expenses. You can build a bigger retirement corpus that is 30X or 35X or 40X of your annual expenses. A higher corpus will accommodate higher annual withdrawals, given the higher inflation rate. Over the years, the life expectancy in India has been increasing. So, a bigger corpus will support longer life expectancy.
The corpus amount will also depend on when you plan to retire. If you plan to retire at age 60 and the life expectancy is 80 years, you need to plan for a retirement corpus that will last 20 years. However, if you plan to retire at age 50, and life expectancy is 80 years, you need to plan for a bigger retirement corpus to last 30 years.
Plan separately for healthcare expenses
In India, compared to core inflation, medical inflation is growing faster, usually in double digits. With healthcare costs rising at a faster clip, you must make a provision for them. Ensure that you have an adequate amount of health insurance.
Review the health insurance cover amount regularly and ensure it keeps pace with the rising healthcare costs. If you have higher OPD expenses, including regular doctor consultations, diagnostic tests, medicines, etc., have a separate healthcare fund for them.
Follow the three-bucket strategy
Indian stock markets are more volatile than US stock markets. During years of deep drawdowns, annual withdrawals can dent the retirement corpus seriously and exhaust it faster than expected. To overcome the stock market volatility, you can follow the three-bucket strategy.
In the first bucket, you can maintain 12 to 24 months of regular monthly expenses in a savings bank account or a liquid mutual fund. The amount is insulated from stock market volatility. In the second bucket, you can maintain 3 to 7 years of regular monthly expenses in a hybrid mutual fund. The debt portion of the fund works as a shock absorber against the volatile equity portion.
The third bucket can have the remaining corpus in equity mutual funds. The fund will be subject to volatility; however, you will not be dependent on this fund for your immediate monthly expenses. The third bucket can feed the second bucket regularly when markets are doing well. The second bucket can feed the first bucket annually.
Factor in a lower than 4% withdrawal rate
As India’s inflation rate is higher than that of the US, the retirement corpus will get exhausted faster. Hence, the investor can start with a withdrawal rate lower than 4%. It can be a 2-3% withdrawal rate. The investor can also start with a retirement corpus that is higher than 25X annual expenses to accommodate the higher withdrawal rate of 4%.
How should you plan your FIRE strategy?
If you are a FIRE aspirant in India, the US model of a retirement corpus of 25X annual expenses and a 4% annual withdrawal rate may or may not work for you. You can modify the model to suit your needs. You can build various safeguards in your FIRE strategy.
Some of these safeguards can include planning a bigger retirement corpus (30X to 40X the annual expenses), a lower withdrawal rate of 2% to 3%, maintaining 12 to 24 months’ expenses in a separate fund for near-term expenses, having an adequate amount of health insurance and/or a separate healthcare fund, following a 3-bucket strategy, etc.
You can use any combination of the above safeguards and customise the FIRE model to suit your needs. It will make sure your retirement corpus lasts long enough till you survive. A customised FIRE model will ensure you enjoy your retirement years rather than worrying about how to make the retirement corpus last longer.
Gopal Gidwani is a freelance personal finance content writer with 15+ years of experience. He can be reached on LinkedIn.
