WHY EARLY RETIREMENT?
- Most high-income earners with software/MBA degrees reach middle-management by age 40
- In the new economy, these people have a high risk of being laid off for being expensive or see their incomes stagnate.
- It is already happening in the IT industry.
- Typically around this age is when you are saddled with multiple expenses like home loan EMI, saving for child’s higher education, saving for retirement etc
- It is very stressful to meet these rising expenses when your income is not increasing or you are laid off.
- But when you become financially independent by age 40 you can make bold life choices like changing careers, starting a business, working less for a healthier work-life balance or simply taking a break for a few years.
- If you start early, you can even become financially independent by your early 30s.
BIGGEST MISCONCEPTION ABOUT EARLY RETIREMENT
- Most people attracted to F.I.R.E think they can “sit and eat” from their early retirement corpus from age 40 till they die without doing any extra work.
- But the actual idea is to achieve the financial freedom to do work you never want to retire from.
WHAT DOES EARLY RETIREMENT MEAN TO ME:
- It means retiring early from the rat race of working only for money sacrificing your personal life goals.
- Instead you save “enough” early in life to give you the safety net & confidence to earn money in a way that makes you happy & fulfilled.
- That “enough” is typically 25 years of expenses.
- Early retirement is simply a re-ordering of priorities: if you want to retire early then save first for retirement ahead of other goals like buying a house or foreign vacations.
SAVE ATLEAST 50% OF YOUR INCOME TO RETIRE EARLY:
- If you save only 25% of your income you have to work 3 years to save 1 year of expenses
- If you save 50% you only have to work one year to save 1 year of expenses.
- Once investment returns & compounding kick in, you’ll be able to save 25 years of expenses within 10-15 years at 50% savings rate
SPEND SMART a.k.a FRUGALITY:
- Frugality means getting value for money without being wasteful in purchases big and small
- For example: People already save 50% in india but in a wasteful manner as home loan EMI.
- On a 20-year home loan with 8% EMI, you pay almost the entire cost of the house as interest to the bank.That is a wasteful way to purchase a house.
- You could have invested that interest money as SIP and become financially independent instead.
- With rental yields at 3% and EMI at 8%, you can rent while saving up to buy a house. That will be less wasteful and less stressful.
ONE ADVICE I WANT TO TELL PEOPLE INTERESTED IN F.I.R.E:
- Learn the Rule of 72.
- It was not taught to us at school or by grown-ups. So even people who understand compounding severely underestimate its power
- You can use the Rule of 72 to calculate how your lump-sum corpus will compound over many years:
- Example: If you save up Rs.1 crore by age 40 and don’t touch it until you are age 65 it will grow to Rs.16 crores assuming 12% CAGR.
- The extra 15 crores is pure returns from compounding.
- You can verify it using this online calculator : Enter Rs.1 crore as initial investment and 12% as expected return over 25 years. Check the final corpus value 🙂
MORAL OF THE STORY:
The real power of compounding comes from saving up a LARGE corpus as soon as possible say within 10 years.
This is the “magic math” behind early retirement.
- Once you understand this concept, you will automatically do all the the steps necessary to achieve early retirement like:
- starting to save early in life
- spending frugally
- saving 50% of your income
- investing in assets that give above-inflation returns
- getting a high-income job
- convincing your spouse about early retirement etc.