Financial Independence: Do you want that even after retirement, your life should go smoothly, without money tension, without EMI worries and without the fear that when the bank balance will run out? Its secret is hidden in a small but very powerful number, which is called FI number (Financial Independence Number). This is the magical number that tells you how much money you will have to save so that working becomes not your compulsion but only your choice. Therefore, FI number is not just a question of mathematics, but the real secret to staying ‘rich’ even after retirement.
Saying goodbye to 9-to-5 job, taking early retirement or adopting a lifestyle like FIRE (Financial Independence, Retire Early) has now become the dream of many Indian youth. But this dream becomes reality only when you get your FI number correctly. This is the amount that can be invested and give you such a return every year that your expenses continue even without salary. The problem arises when people consider this number too low and later get into trouble due to inflation, medical expenses and lifestyle changes.
What is FI number?
In simple words, FI number is the total amount which once invested should meet your entire annual needs with its returns i.e. the money should work for you, not you for the money. Figuring it out is a bit different in India, because inflation, medical expenses and family responsibilities are higher here compared to western countries. If your investments are covering your annual expenses, you are considered financially independent.
First know your real annual expenditure requirement
People often consider their current salary as expenses, which is wrong. Note actual expenses for 3-6 months. Include everything from travel, medical, school fees, domestic help, subscriptions, house repairs etc. The average of all these will tell your actual annual expenditure. Remember that after retirement, adopting a new hobby, traveling more or shifting to another place can increase expenses.
Choose the right withdrawal rate
Internationally the rule is 4%, but in India generally 3%-3.5% is considered safe. Considering inflation and rising medical expenses, a low withdrawal rate remains safe in the long run.
Add inflation and future lifestyle
Inflation is the biggest enemy of FI numbers. Today’s monthly expenditure of Rs 60,000 can become Rs 1.2 lakh in 15-18 years. If you calculate FI number on today’s expenses, your savings may fall short at the time of retirement. Apart from this, it is also important to add children’s education or marriage, medical increase, lifestyle upgrade etc.
Investment returns and the right asset mix
Equity is important for the long term as it gives returns above inflation, while debt brings stability. Many early retirees adopt a bucket strategy – spend 2-3 years in safe instruments and the rest in equities.
Keep track of taxes as well
Capital gains, interest income and pension are all taxable. The impact of tax while withdrawing money from different sources can change your FI number.
Passive income is a bonus, not a trust.
Rent, dividends or freelance income can reduce your FI number, but relying solely on it is risky. It is better to consider it as a bonus.
Now get your FI number like this
The easiest thumb rule-
Annualized Expenses × 25 to 33x (depending on your withdrawal rate)
But from India’s point of view, calculate future expenses by adding inflation, future medical expenses and family responsibilities and then apply 3%-3.5% rate to get the right FI number.
