FIRE Strategy by US-based NRIs planning to Return to India

In recent years, the FIRE (Financial Independence, Retire Early) movement has gained grip among young professionals and retirees seeking financial freedom along with the ability to exit the workforce before the traditional retirement age. The core principle of the FIRE strategy remains constant, which is to save aggressively, invest wisely, and minimize expenses. However, NRIs may face unique challenges and considerations that can affect their approach to achieving financial independence.

In this blog, we will discuss everything about the FIRE strategy for NRIs. We will understand the various methods available, calculating your FIRE numbers, tax and currency implications, and much more.

What is the FIRE Strategy?

The FIRE (Financial Independence, Retire Early) strategy is when you save aggressively and invest a huge portion of your income during your working years. This helps you generate enough investment funds, which can cover all your living expenses. So, you can quit your job before the traditional retirement age. It basically follows two main goals:

• Gather enough wealth to live off investment returns forever, and
• Do this earlier than the typical age of retirement, which is usually 60 or 65.

Financial independence strategy for NRIs is not just one method, and it comes in several variations, which are as follows:

Lean FIRE

It means when you retire early by spending less and maintaining a simple lifestyle. You need to cut all your non-essential expenses and cover only essential needs. Since you keep your expenses low, you can reach your retirement goals much faster. 

It is ideal for those who can live a simple life, often in less expensive places. Also, for those who prioritize free time more over buying material things or living a luxurious lifestyle.

Fat FIRE

The Fat FIRE strategy allows you to retire early while also living a luxurious lifestyle. Although it doesn't focus on cutting back expenses or living strictly, it requires a high income and aggressive saving. It focuses more on growing income to afford premium healthcare, travel, and a luxury lifestyle.

It is ideal for high-income earners who wish to retire early without sacrificing their luxurious lifestyle.

Barista FIRE

It is a plan where you save enough money so that you can leave your stressful full-time job. However, you do a part-time job to cover the rest of your daily living expenses. Your investment savings will cover a large part of your bills, and your part-time income will cover the rest.

Other methods require you to save a huge amount so that your investments cover all your bills. But Barista FIRE requires saving only about half of that amount. Since your money is invested, it also keeps growing.

It is ideal for those who wish to back out of the stressful corporate jobs but don't want to fully stop working, basically semi-retire early.

Coast FIRE

It means you save aggressively and build a baseline investment corpus. Then, when this money reaches a certain milestone, you leave it to compound on its own until the traditional retirement age. It means you will not need to make any additional contributions for it to grow.

Although this doesn't mean you are fully retired, you don't need to save for the future. All you need to do is earn enough to pay for your current expenses.

Now, you don't need to be confused. In simple words, Lean FIRE means cutting expenses and living a minimal life, while Fat FIRE means saving a huge amount to live a luxurious lifestyle without compromising your current lifestyle.

Coast FIRE requires reaching an investment milestone so you can stop saving entirely until retirement, and Barista FIRE means you quit your full-time job and work part-time to cover daily expenses. For NRIs, Barista FIRE and Fat FIRE are the most practical plans.

Moving further, let's see how the FIRE strategy for NRIs works.

How Does the FIRE Strategy Work?

The FIRE (Financial Independence, Retire Early)strategy is based on three main habits:

• Save a Big Portion of Your Income: This means putting away 40% to 70% of what you earn. This is basically much higher than the usual 20% suggestion.
• Invest Smartly: Use that saved money to invest in assets that grow in value, such as stocks, index funds, or real estate.
• Cut Unnecessary Expenses: Stop spending on things that don't really improve your life.

For Non-resident Indians (NRIs), one more factor is important, which is currency. So, if you earn in currencies like dollars or euros but aim to retire in India, your retirement goal (FIRE number) will be affected. It will depend on the exchange rate when you withdraw the money, and not just when you calculate it. A weaker rupee can help, while a stronger rupee can decrease the value of your retirement fund.

That's all about the working of the FIRE strategy. Let's now see how you can calculate the FIRE number.

How to Calculate Your FIRE Number?

To calculate your FIRE number, use this formula:

• FIRE Number = Annual expenses * 25

For example, if you expect to spend $12 lakh a year in retirement, your overall target for savings should be around ₹3 crore, which is ₹12,00,000 * 25.

Additionally, if you are an NRI, you should do this calculation twice: Once in the currency you earn currently and once in Indian rupees. It means you basically use a realistic long-term exchange rate instead of today's rate. The difference between the two results can be surprising.

Let's take a look at a quick example of FIRE calculation.

Consider Rohan, a software engineer living in Germany. He wants to retire in Pune at 50, expecting to spend ₹15 lakh a year. Thus, his FIRE number is ₹3.75 crore.

However, since he earns in euros, a decrease in the euro's value relative to the rupee could mean he can get fewer rupees for his savings when he retires, even if his investment account balance remains the same. To cover for this potential change, he sets aside an extra 10% to 15% on top of his FIRE number.

Now comes the main question: Is the FIRE strategy good for NRIs? Let's understand that.

Is the FIRE Strategy Good for NRIs?

Yes, the FIRE strategy can be beneficial for NRIs. Many earn in stronger currencies, have access to retirement plans from their employers, and can invest in various markets. However, there are three main differences in planning for FIRE as an NRI as compared to a resident:

• Returning to India, even temporarily, can change your tax status.
• You might have tax obligations in both countries where you earn and retire.
• Your retirement amount is linked to a country and currency you might not live in right now.

None of these rules FIRE out for NRIs. It means you must consider extra factors that many generic guides might miss. Next comes the main part, where you should retire, and which costs less between living abroad and retiring in India.

Living Abroad vs Retiring in India: Which Costs Less?

Usually, the biggest decision is to decide where to retire because it impacts your financial plan. Don't worry, here is a comparison between retiring in India vs. living abroad:

Retiring Abroad

• It comes with a higher cost of living and healthcare in most Western countries
• You might still owe taxes on retirement income, based on your visa and residency status.
• Investments might stay in more mature and stable markets.

Retiring in India

• Living costs are typically lower
• You might qualify for a tax status, which is RNOR, that protects your foreign income for a few years after returning.
• You get access to Indian real estate, family support networks, and familiar healthcare systems.

Many NRIs choose the path in between. It means they collect wealth abroad in a stronger currency and then retire in India, where that same money covers more.

Moving further, we will now discuss the currency and tax implications of the FIRE strategy for NRIs.

Understanding Currency and Tax Implications

This is the point where many NRIs' FIRE plans go wrong. Here are some key points to know before you lock in a number:

• Tax Residency Status: Your tax residency in India is determined under Section 6 of the Income-tax Act based on several conditions, including the 182-day rule, the 60-day/365-day rule, the 120-day rule for certain individuals, and deemed residency provisions. Your Residential Status determines whether only Indian income or your global income is taxable in India.
• RNOR Status: If you satisfy the conditions under Section 6(6) of the Income-tax Act, you may qualify as a Resident but Not Ordinarily Resident (RNOR). The duration depends on your residential history and applicable tax residency rules. During the RNOR period, certain foreign income generally remains outside the scope of Indian taxation, subject to the provisions of the Income-tax Act.
• Capital Gains Tax: Capital gains tax may vary based on where your investments are located. So, for equity investments held in India, long-term gains above ₹1.25 lakh in a financial year are taxed at 12.5% while short-term gains are taxed at 20%. The DTAA between India and your residence country allows you to claim credit for the taxes you have already paid abroad. However, the paperwork and timing rules may vary based on the country.

Although all of these calculations, investments, and planning may be done easily, if you do everything smartly. However, even after that, you may end up facing some common challenges. Let's discuss these challenges.

Common Challenges with the FIRE Strategy for NRIs

Here are some of the common challenges that NRIs face with the FIRE strategy:

• Currency Risk: Your FIRE number can fluctuate with exchange rates, even if your investments remain the same.
• Healthcare Costs: Healthcare expenses usually rise faster than other costs. So, it’s important to keep a separate buffer for this.
• Double Taxation: Even with DTAA in place, claiming credits for foreign taxes can be complicated and may lead to paying tax twice temporarily.
• Travel Costs: Frequent travel between India and your current country can add unexpected costs that are often overlooked.
• Indian Real Estate Investments: Rental income in most Indian cities isn't very high, so real estate should be seen as just one part of a broader financial plan.

To ensure you follow the FIRE strategy wisely, let's now take a look at a quick FIRE checklist for NRIs.

Quick FIRE Checklist for NRIs

• Calculate your FIRE number in both your current income currency and in rupees.
• Add a 10% to 15% buffer for currency changes.
• Understand your tax residency before deciding on a return date.
• Check if you qualify for RNOR status and for how long
• Identify any foreign investments and understand the tax implications.
• Set aside separate funds for healthcare instead of estimating.
• Consult with a cross-border tax advisor at least a year before retiring to catch any important details.

The Bottom Line

The FIRE (Financial Independence, Retire Early) strategy helps you focus on saving for the future instead of spending money now. For NRIs, this strategy can lead to a free and fulfilling life. However, you must plan carefully, have economic awareness, and also have a good understanding of the tax rules.

NRIs can successfully retire early and return home by following a smart plan and talking to a financial expert at Savetaxs. At Savetaxs, we have an entire team of experts who are familiar with and skilled in the rules of cross-border financial planning, taxation, and everything related to NRIs. We can help you clear all your doubts and ensure 100% compliance with all the rules in your residence country and in India. Contact us today as we are actively working 24/7 across all time zones.