How you can calculate your early retirement fund
Financial Independence, Retire Early (FIRE) has come to signify the aspirations of people who want to save and invest extreme amounts so that they can leave the workforce well before the traditional age of retirement.
When calculating the FIRE number, one rule of thumb is to simply multiply your annual expenses in the first year of retirement by the number of years of retirement. The number of your retirement years, in effect, becomes your expenditure cover multiple.
If your annual expenses in the first year of retirement are ₹10 lakh and you intend to be in retirement for 40 years (assuming a retirement age of 50 and life expectancy of 90 years), you’d need a cover of 40 times, which translates into a FIRE number of ₹4 crore.
But what if you decide to retire earlier and the number of your retirement years is longer? Do you need a higher or lower cover multiple than the number of years in retirement?
A study co-authored by Rajan Raju and Ravi Saraogi goes beyond the basic thumb rules of calculating corpus cover and the rate at which funds can be withdrawn for income during retirement, digging deeper into what can be considered as a safe corpus cover for early retirees.
An analysis using the Monte Carlo method involves running simulations on inflation and market return data over a 20-year period to project a safe withdrawal rate for the retirement corpus. The withdrawal rate can be used to determine the corpus cover required vis-a-vis the first year of expenses – the higher the expense multiple, the lower the withdrawal rate and vice-versa.
The study has some interesting findings. It shows that the required cover multiple ends up being slightly lower than the number of retirement years when the number of years in
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