5-min guide to Early Retirement


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.

Interested? Read my detailed guide on how to Retire Early in India