Bored of 9-5 job? And want to retire early in your 40s, or even earlier? Well, you may not be the only one thinking on this line. Discussions around retirement before the 40s may be relatively new for India as the predominant mindset here is of retiring at 60 or 58. But in the US, almost a kind movement to retire early has been going on. Many individuals have tried to reach this goal of retiring at 40. Before setting such a goal, however, few questions you should ask yourself: Do I really want to retire before 40? Is it really possible? Recently at a retail investor-focused online event ‘Thrive’ organised by Groww, CA Rachana Ranade delved deep into this topic with some interesting insights. Here is a summary and key points from her session that may help you if you are also planning to retire before 40s.
“In the USA, this movement (of retiring before the 40s) started very predominantly where people were more interested to slog, to earn, to spend with very very conscious efforts and then try and save a lot of money and retire rich early,” Ranade said. She added that this movement was called FIRE – Financial Independence & Retire Early – movement. There were two elements of this movement: Financial Independence and Early Retirement.
Without financial independence, one cannot retire early. But what does this financial independence mean? There are multiple interpretations of financial independence:
1. Financial independence is basically based on the concept that instead of you working for money, money should work for you. It is said that when your passive income is more than your active income, you may say you have achieved financial independence.
2. You don’t have to depend on a 9-5 job. There should be other sources earning revenue for you.
The FIRE movement was based on three parameters: Extreme savings, Frugality and Generating a passive income.
You might have heard of the 50-30-20 rule, which basically means 50% of your income should go for your needs, 30% for wants and 20% towards savings. If you go by this rule, Ranade said you may not be able to retire before 40. For that, the FIRE movement prescribed that 50-70% of total income should go towards savings. So what are the three steps you should take to retire before 40? Learnings from the FIRE movement can be summed up in three points:
First, Determine your saving percentage: You should be prepared to save up to 50-70% of your total income.
Second, calculate your target retirement corpus. Wondering how much you would require on retirement? Well, Ranade said that under FIRE, they gave a formula to calculate this: Multiply total annual expenses with 25 to find the retirement corpus you may require. For example, if your annual expenses is Rs 10 lakh, you would require Rs 10 Lakh x 25 = RS 2.5 crore as a retirement fund under FIRE.
Third, find out how long will it take you to reach the goal.
There are three approaches prescribed under FIRE:
Lean FIRE: Try to minimise your expenses and maximise savings.
Fat FIRE: Spend a little more. Under this, you will be able to retire early but not as early as you want.
Barista FIRE: In this, you save enough money which will allow you to retire early. At the age of 26-28 years, try to get that much money to go head with your own business/startup. If your startup clicks, you may be able to retire before 40.
All of the above concepts were made famous in the US. But in the Indian context also you can calculate what you require to retire early. While doing all these things, there are certain points you required to follow to retire early:
- Redirect your cash gifts or pocket money. Better put them in a bank account or invest.
- Career planning: Plan your career very early. Start planning at an early age. If you execute your plan well, chances of success and reaching the goal would be fairly higher.
- Avoid or have minimum Debt. There are many people who think that credit card is a must. Well, the credit card is a good thing if you spend wisely. But if you are using your credit card without giving a second thought, it will be very bad for you. If possible try to avoid a debt if it is not really required.
- Reduce your spending. For that follow a “magical formula: Instead of following the “Income-Expenditure = Savings” formula, follow “Income-Savings = Expenditure” formula. That is, set a saving target from whatever you are earning and spend the remaining amount. In that case, you will be able to attain the concept of FIRE at the right age.
- Get yourself insured: You need to do this so that your dependents are taken care off in case of an emergency. If you are not insured, whatever you have saved for a long time may go for a toss if there is a medical emergency in the family.
- Build an emergency fund: No matter how much you are investing or earning, an emergency fund is something that is a must.
- Have a backup plan: If one plan doesn’t work, you should have another plan to reach your goal to face situations that may be beyond your control.
Ranade further suggested that you should never withdraw interest earned on a deposit. Let it remain invested to earn interest on interest.
How to diversify portfolio
Ranade shared different case scenarios for explaining how to diversify the portfolio:
If you are a young employee with no dependents:
50% equity scheme, 20% direct equities, 10% index ETF, 10% international fund and 10% liquid scheme. Your maximum investments should be in equity. There is a thumb rule: “100-your age” should be the proportion of your investment in equity.
If you are the only income earner in the family and 2 kids going to school:
40% in equity scheme/direct equity; 20% in index ETF, 15% in FDs, 15% in Debt scheme and 10% in liquid scheme.
Single income family with not yet settled grown-up children
30% equity scheme, 10% direct equities, 20% index ETF, 20% Bank FD, 20% debt scheme, 10% Liquid scheme
She said that the above are just examples as there is no one thumb rule. Had it been so, why would there have been portfolio managers? Ranade quipped.
You should check based on your own background and then you can decide on how to diversify your portfolio.
Big question: Why you want to retire early?
Ranade said that before setting an early retirement goal, you should ask yourself why you want to retire early? Is it really really required. You should ask yourself: Whether you love your job? Are you passionate about it or not? Life is uncertain. It is a wholesome concept. “People are just going mad behind earning money. Dont do that. I feel that if you are doing a job which you love, retiring at 50 or even retiring at 60 will not be a problem,” she concluded.
Thrive by Groww is an initiative to bring the smartest minds of India to talk about money. Aimed at retail investors, the virtual event was held on March 20, 2021.