Heard about FIRE? Anil Rego on how to go about it

Anil Rego, Founder & CEO, Right Horizons, says “if you want to retire early, you should make your money work for you and that was simple, one liner and avenues which can help you do that, which can help you beat inflation, which can also grow well, it also means that possibly you need to take a higher level of risk. So, some of the equity related things, whether it is a mutual fund, stocks, or even PMS, will become an important part of your portfolio because you want your capital to grow fast. And at the same time, it is important to be diversified because while you have some of these long-term goals, you will also be juggling with your current day to day needs.”

Let us talk about this term that has taken the entire personal finance space by fire. Literally the term is FIREFinancial Independence and Retire Early. It is a very trending term right now among gen Z’s and millennials as well. It has largely to do with saving or investing enough right now to be able to retire early in the future. So, for the sake of our viewers, break down this term for us. Help us understand why this term has become so buzzing and so popular

Anil Rego: Yes, financial independence and retire early is what FIRE is all about. It has become something almost everybody aspires to do. Today, you have a lot of individuals looking to become entrepreneurs, people liking to do different things, wanting to be fulfilled in their lives. And from that, they want to be financially independent early. They would also like to focus on their passions at some point of time. They do not want it to be such that they come to a certain age and after that they are not able to achieve them and yes, it has also been good financially, for a lot of people they have got good salaries, they have seen good growth. Many of them have seen ESOPs and stuff, so that has become an important aspect for them.

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Typically, one looks to retire probably by their 40s. I will give my own example because I had this goal of retiring from corporate life when I was 35 and I kept that goal right from an early age, right from the time I started working and was actually able to achieve it earlier than scheduled. So, when I was about 30-31, I ended up setting out and starting Right Horizons. So, in some form, this is something that has been there, but yes, today, it has come into prominence.

We will get to your journey when it comes to early independence as well. But for now, help me understand this because like you said, the psychological focus among people has increased. Focus on mental health is going up. People are understanding the importance of leisure time. The fact that there is more to life than work. How and where can one invest enough to be able to retire early, say early 40s.

Anil Rego: Yes. So, let me also capture a few points that a lot of people keep in mind. In terms of where can they invest? The points that you look at is if you want to retire early, you should make your money work for you and that was simple, one liner and avenues which can help you do that, which can help you beat inflation, which can also grow well, it also means that possibly you need to take a higher level of risk.

So, some of the equity related things, whether it is a mutual fund, stocks, or even PMS, will become an important part of your portfolio because you want your capital to grow fast. And at the same time, it is important to be diversified because while you have some of these long-term goals, you will also be juggling with your current day to day needs. So, you would be needing to have your asset allocation, your own debt, your liquidity, and all of it.

So, broadly, I would say look at avenues that are market linked for a significant part of it, but for a part of it look at what is your risk profile and your asset allocation and within funds, then you can say, how do I break it up? Maybe starting off with a hybrid of debt to equity and the equity side possibly to largecap, midcap, smallcap, have a good and disciplined investment style, do SIPs. As your portfolio grows, you can start looking at PMSes and other avenues which can also help you go along the way.

Now does aiming for an early retirement in the future means that one needs to live frugally at present? This is a misconception that a lot of people have that if they are able to just live frugally or should I rather say miserly, they will be able to retire early. Is this a misconception or could you clear the light around this?

Anil Rego: Yes, I think it is definitely a misconception on two points. One is right now while you are striving towards it and secondly as well later post retirement. In both cases, life is about finding a balance. So, you need to strike right between enjoying your life and not going overboard. Yes, look at mostly what your needs are and work towards them.

But there also, there will be wants that come on the way and it is about how you are able to find that balance, not only now, even tomorrow in the future when you are retiring or when you are into your early retirement so to say, you may still want to go for your overseas trips, you may want to do a lot of the other things that you spend on, but the point is how do you plan for that both today as well as post the retirement life or post when you stop working? I would rather say and that is important to keep that in mind.

If you plan accordingly, that this is the standard of living that I want to have later and even right now this is what my expenses, etc, are, I do not go overboard on my expenses and at the same time I do not also live frugally and at the same time how do I make my money work for me,?

Even if you ook to stop working by your 40s, there is enough time for compounding as well. But then you need to start early. So, you need to start early enough so that you have that 15 years, 20 years of compounding and that even though, let us say it is a smaller part of your overall compensation, the compounding also helps work for you and you are able to achieve it.

Let me break down this term a little bit more. Let us focus on the first two words of this term financial independence. Now, it is a subjective term, it is a big umbrella term. According to you, in your view, what exactly is financial independence and how can one actually become financially independent without having to worry for future emergencies as well?

Anil Rego: I think the independence comes from being able to do your day-to-day stuff without having to watch over it all the time and being able to live your standard of living, being able to pursue your passions and I think that is about financial independence. It is also about having the capital and maybe a backup for you so that you have the confidence to be able to do that and even when I did it for myself, I said, yes, this is the capital that I want and, of course, that time I put a number of a crore, that was many almost like a couple of decades back, I guess so that is something which you set yourself a goal towards and for each person it is going to be different.

So, financial independence for one person by nature you may be living frugally and you are happy about it, you are actually trying to be miserly but that is your nature; somebody else, may be going very aggressive. You have to see what it is that works for you. Financial independence is very subjective and it depends on person to person but the point is, are you able to do all that you were able to do while you were working. If you are not and I think that is where independence comes from. What gives you independence is the capital that is there behind you and you know that okay I have this capita, which is there which can help me, say, take care of my monthly expenses and also possibly for certain emergencies.

I am going to throw a hypothetical at you. Let us say I am in my late 20s right now and I have decided that I want to retire early. How do I factor in variables like children along the way or health insurance or paying for any loans that you want to take as you grow older? How do I factor in all of this while also being stable on the path of achieving early retirement?

Anil Rego: The best way of doing it is to start up with a financial plan. And like you said, how do you capture all those milestones that you have, both for yourself and for your family as a whole and typically we also encourage, let us say, a family to do the financial planning also together, also to converge now you may decide to have certain mechanisms in place saying that, okay, how do you want to spend, each of you want to spend your money and towards what and etc. But I think many of those goals are common.

So, need to first go back, look at some of your goals, and not all of them may be visible right now. So, if you are in your 20s, you may be married, may not be married. If you are, then yes, some of them are clearer in terms of priorities. But even if you are not, then you have to come back and try to capture it and say, okay, this is likely the thing, even including for my marriage, this is the expense that I need to spend, probably a lot of it becomes very theoretical I would say because you may be doing it a lot earlier and they may not be visible but I think it is important to have those placeholders. And even if it does not happen, the way I look at it, it is okay. What we suggest because you are doing it so much in advance, is you have to revisit your plan.

You have to revisit your plan every three years to five years and relook at all your assumptions and then life is a journey. So, as long as you do that, our experience is there may be something new that comes up, there may be some rework that you have to do, many times we find there is even a standard of living change that happens, there is a large house that you buy, so you have to look at all of those. And yes, in your journey, there will also be liabilities that come along the way because you may want to buy your own house and that is a good idea because it also helps you save tax and the tax saved comes back to you in some form and that sort of is making your money work for you as well.

So, you may be able to converge on some of these, sort of put them together and then go back and work towards it. If you are also going in on a periodic basis reviewing your plan, then I think as you come closer to your goal you will have achieved it and I am still saying even if there is some gap, it is okay. It is okay because maybe now it is a percentage gap that you have. Otherwise, if you have not even looked at it, you may not even have it out there. So, you may not even plan for it. So, it is better to plan for it and have, say, 10% gap versus not planning for it at all.

Let us talk about the impact of inflation because over the course of saving we are going to be seeing higher inflation rates or we have to course correct as and when inflation goes up or goes down. What is your advice to our viewers on how they can diversify their funds for maximal returns keeping in mind that they will also have to factor in for inflation?

Anil Rego: I think inflation is an important aspect that people need to consider and I also say that based on experience, most people underestimate the need to plan for inflation and underestimate the impact of inflation and I just simply give it in a way which is easy to illustrate. Let us say today, if you need a lakh a month, say in about eight years, you may need Rs 2 lakh a month and in about 16 years, it is almost Rs 4 lakh a month.

So, I am just saying it goes up crazy and the next cycle, if you look at it, it becomes almost like Rs 8 lakh which is about a crore a year. So, the numbers are staggering and imagine if you need a crore a year in the last years which is most likely going to happen, again, only because of inflation, it is very-very important to take care of inflation.

While you are planning, it is a good time to do it. Excel has this calculator which you can use, look at the compounded rate of growth of inflation and capture what is it that you sort of require, say, at your retirement and also post retirement you have to see how you can model it into saying inflation even post retirement because that is something which is very critical to you.

If I retire at 45 or 40 and it is not likely to be Rs 1 lakh as of today. You have to compound that as well and say, okay, this one lakh as of today maybe say three or four lakhs and also how do I take care of inflation post 45 years. So, that is a very important aspect and like you said most people miss it out when they calculate it and doing a financial plan may be a good way of doing it and if you are not able to do it yourself, you can always enlist the service of a financial planner.

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William Murphy

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