In recent years, the trend of wanting an early retirement has caught the imagination of millions of people across the world, predominantly the millennials. Many who wish to retire early have started adopting the ideas of FIRE (Financial Independence, Retire Early) that originated in the US and spread across the globe, inspired by the 1992 book Your Money or Your Life by Vicki Robin and Joe Dominguez. In this blog we'll debunk whether or not the early retirement life is suited for you. And if it is then is FIRE method the best way ahead.
Traditionally, the average retirement age in India is 65 years. However, owing to the influence of western pop-culture, millennials in India have started to romanticize the concept of retiring by the age of 45 to pursue their respective passions.
However aspirational it may sound to quit your 9-5 job and move on to pursuing your artistic calling, it might not be the right lifestyle choice for you. So, how do you know you're ready to retire early?
Before you start putting a plan in motion, ask yourself these five questions:
After factoring in all these doubts, if you still find yourself wanting to plan your early retirement then without any further ado let's proceed to understand the FIRE method…
FIRE is a method of rules where people adopt extreme saving methods to have financial freedom earlier than the conventional retirement age of 60-65 years. While early retirement is a major goal for some Fire followers, it is more about building a saving and investment that will give financial freedom and flexibility in post-retirement life, such as working part-time or freelance or not working at all.
One of the drawbacks of the FIRE theory is that it assumes you have a large income. Without it, there is no way to build up considerable wealth before turning 40. Moreover, the 4% rule works only if you spend the same amount every year.
FIRE doesn't take into account any financial emergencies or economic conditions of the future. In order to, follow the FIRE method successfully, an individual will be required to save a sizeable portion of their income every month.
Now, the big question is “how much money do you need to have post-retirement?”.
William Bengen, a Brooklyn-based financial advisor, introduced the 4% rule in 1994. According to this rule, a person's retirement fund should be 25 times their annual expenses, allowing them to withdraw 4% from the retirement fund every year.
However, if you're living in India then this formula is only effective after minor tweaks. Continue reading this blog to know the right calculations for an effective execution of your early retirement plan.
Estimate the need: The first step you need to take when starting to plan your early retirement is to estimate the money that would be required to take care of the needs of you and your dependents, once you retire. You will have to factor in the basic expenses such as housing rent or EMI, food, clothing, utilities, transportation, insurance, and healthcare. One factor that you have to note here is that you ideally enter retirement free of all debts, whether be housing loan, credit card outstanding, or any kind of loan or outstanding bills. If there are still any liabilities outstanding when you retire, that amount must be included in your budget. Add discretionary expenses including those for entertainment, travel, leisure, and hobbies. A total of all these items will provide you with a view of how much you will need each month to maintain the retirement life you wish.
Calculate the required savings: If you wish to retire early in your 40s or 50s, you will need to add the extra number of years and plan for a long retirement period that could last for more than 30 years or more, keeping in mind the steady rise in the life expectancy.
Let us take the example of Sanjay, a 25-year-old considering retiring at the age of 45. His monthly expenses amount to Rs. 40,000 in 2022. Assuming an inflation of 6% per annum, when he turns 45 in 20 years, his monthly expenses will approximately be Rs. 128,285 in the year 2042. Moreover, inflation will also rise after he retires. So, his retirement corpus will reflect all of this.
This is how Sanjay’s monthly expense will grow-
|Current Monthly Expenses at the age of 25||40,000|
|Required Monthly Corpus at the age of 45||?128,285|
|Required Yearly Corpus at the age of 45||?128,285 x 12 = 15,39,425|
So, for the seamless execution of Sanjay's early retirement plan, he will need a retirement fund worth 30 times his yearly expenses.
Save extremely: Early starters have an advantage of the power of compounding and time horizon. It helps you save frequently and extremely by putting aside 25% to 50% of their income every month. Saving at this level will need you to identify indispensable expenses and make some lifestyle changes to adjust to the expense cut. You can follow money-saving tricks and decide where to put your savings.
Invest intelligently: You must have the estimated corpus when you retire not only in absolute value but also in real value. Poor investments will not only give low income but will also erode the value of your investment by inflation. You need to invest your savings in products that grow your money. Most FIRE savers create a portfolio of investments that can meet your goals with minimum risk.
Earn more and spend wisely: Saving alone won’t be enough to achieve the goal. You may have to boost your income to pursue extreme investing early on, which may require you to find other sources to earn additional income if your existing income is not enough for the amount of investment required to meet your goal. It is critical to manage instant gratification and avoid spending on luxury items to save fast. That might mean delaying or resisting instant gratification.
To wrap it up into simple words, planning your early retirement is not a piece of cake but it's not entirely impossible. A positive mindset, an aggressive savings plan, a balanced investment portfolio, and zeal for life is all you need to flip the switch on your true calling!
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