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Want to retire early? Here’s what it will take

Considering that retirement is a non-negotiable and generally unavoidable event in every working professional’s life, the fact that only three in ten are actually doing anything to prepare for it, much less about retiring early, is eye opening.

33% - that’s the percentage of working age employed Indians actually saving for retirement, based on study done in 2018 by a leading global bank. Considering that retirement is a non-negotiable and generally unavoidable event in every working professional’s life, the fact that only three in ten are actually doing anything to prepare for it, much less about retiring early, is eye opening. Considering the turmoil in many sectors in India in the recent weeks, it would be wise to consider if we are actually prepared for retirement, forced or not.

What is retirement really?

Individuals in their 20s or 30s associate retirement with old age. However, as a growing number of people in their 30s have realised, retirement has nothing to do with age but circumstances and your personal expectation from life. 

It’s easy to imagine that you can work forever when things are great at work and you are the talk of the office. Others think of work as a status quo situation where as long as they keep getting their pay cheques, life is OK. Talks of layoffs and the like are still rare in India, unlike in countries such as the United States. Considering the turmoil in many sectors in India in the recent weeks, it would be wise, though, to consider if we are actually prepared for retirement, forced or not.

But for some, retirement is not unavoidable but desirable. They find that they would rather work on something they are passionate about or explore things they would really like to do rather than the 9-5 they do for the sake of a salary. To them retirement is a kind of freedom from being forced into a life they don’t necessarily enjoy.

Don’t get me wrong. Many of us really go to work with purpose and a spring in our steps. But if you are among those who seriously wants to consider joining the FIRE (Financial Independence and Retire Early) movement, here’s a quick primer to help you understand the things you need to consider beforehand.

#1. Expenses

Retiring early is largely about expense control because you don’t have much time to earn and save considering the goal.  You will have to control your expenses so that they are managed by the returns from your investments. This means, the lower your expenses, the earlier you can afford to retire.  

#2. How much do you need?

Retirement is reliably and realistically possible when you have saved up at least 25x of your annual expenses. Your annual expenses need to include both fixed and variable expenses as well as loan repayment commitments. The longer your earning, and saving period, the more “comfortable” you can afford to be in retirement. Also, it’s a good idea to have a house of your own along with 25x your annual expenses.

You need to invest your savings in such a way that it generates enough returns for you to live on and also grows and beats inflation. For example, if your total annual expenses are Rs 6 lakhs, this is what your investments need to generate, at least. Keep in mind that this is just for the money you need to live on. 

#3. Where does the 25x of your expenses need to be?

You need to invest your savings in such a way that it generates enough returns for you to live on and also grows and beats inflation. For example, if your total annual expenses are Rs 6 lakhs, this is what your investments need to generate, at least. Keep in mind that this is just for the money you need to live on. 

You need to be invested in equity funds to keep up with inflation. Essentially you need a portfolio of both, equity based, and fixed income based, mutual funds for your savings.

#4. Retirement doesn’t mean you stop working

The idea behind retiring early is not to stop working but to only work on what you want to. The goal is to gain financial freedom when you have saved up 25x of your expenses and have a house of your own. This leaves you to base your life decisions not on money but on satisfaction and happiness.

Retiring early, or rather having the choice to do what you want, is not impossible if one plans well and starts early. All it requires is a focus on what matters to you and if you are willing to make the tough calls that come with this decision.

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