In my previous post, I went in depth about FIRE and how it is calculated. In this post, I’ll cover in detail the implementation of the concept while accounting for inflation! If you haven’t read that post, here’s the link.
Now although 25x multiplier makes sense if you want to retire today, it won’t suffice if you are planning to retire sometime in the future.
The 25x multiplier and 4% Rule remains the same for the FIRE Corpus, but will differ for FAT FIRE and LEAN FIRE. Read till the end to know what are FAT and Lean fires.
Coming to the main point of this article. There’s one culprit who can ruin all your retirement plans, and that culprit is none other than inflation. Accounting for inflation can play a major role in helping you achieve your FIRE Corpus and making it last.
What’s essentially happening is that over time, the value of money drops. This in finance is commonly referred to as ‘Time Value of Money’. I’ll keep it simple. The same Dairy Milk I bought for Rs 10 in 2014, offered much more quantity than in 2024.
Meaning the purchasing power of money has dropped. And this is bound to happen in future as well. This is why it is important to incorporate inflation while calculating FIRE.
How to account for inflation while calculating FIRE
So, how do you do it? It all comes down to the basics again. Have you heard of the compounding interest formula? Yes, math is implemented more than we think it is. (Reminds me of Mitochondria is the powerhouse of the cell!)
A = P * (1 + R) ^ N
This is the compounding interest formula where, P is the principal, R is the rate of interest and N is the number of years.
Ideally, what one needs to do here is inflate your yearly expenses until the year that you’re retiring.
Let’s take an example:
My current yearly expenses are Rs 6 lakh. My current age is 22 and I plan to retire at 50. Based on my lifestyle, I’m assuming an inflation of 7%.
So, this would translate to Rs 6 lakh * (1 + 0.07) ^ (28) = Rs 39,89,303. Now this ~Rs 39 lakh will be multiplied by 25 to arrive at your FIRE Corpus.
Note: Here 0.07 is basically 7%, which is my inflation rate. 28 is the number of years left until my retirement.
This is how you incorporate inflation while calculating your FIRE Number.
An overview of different types of FIRE
Finally, I’m gonna touch upon the other types of FIRE, which are LEAN FIRE, FAT FIRE and COAST FIRE respectively.
Lean FIRE – This can be viewed as a milestone while achieving FIRE. Instead of multiplying by 25, you’d multiply your expenses by 20. With this corpus you can’t fully retire yet, that’s why I view it as a milestone. But there’s more to do!
Fat FIRE – Two parameters change here. Firstly, you’ll multiply expenses by 50. Secondly, just withdrawing 2% of your corpus will suffice. PS: Here 2% of the corpus will be equal to your yearly expenses.
Coast FIRE – This one’s a little different. I’ll explain with an example: Let’s say I want to retire at 50, but I want to stop making investments at 45. I’ll accumulate a corpus such that, once I’m 45, the existing amount will compound to reach FIRE.
FIRE aids people to achieve financial independence and mostly importantly a sense of security about their financial safety.
Disclaimer: The above content is for informational purposes only. Please consult a SEBI-registered investment advisor before investing in market-linked instruments
