The FIRE movement, which propagates financial independence and early retirement, advocates substantial savings— up to 70 percent — so that an investor can retire in their 40s. After having retired, one can withdraw the money in small chunks, nearly 3 percent, to ensure that the fund lasts the investor’s lifetime.
As a matter of fact, when you plan to retire early, you must make sure to earn at a faster pace, spend less, and most importantly - save. But bear in mind that without factoring in inflation, your plan is likely to get jeopardised. For instance, if you need ₹10 lakh in a year to meet your family expenses, you will need more than ₹16 lakh after 10 years, if inflation stays constant at 5 percent. So, retiring decades before the traditional age of 60 calls for immaculate planning.
Let’s assume that you are 30 and want to retire at 45. You have 15 years to build a fund that will meet your expenses for 30-35 years after your premature retirement. This is why, the retirement in mid-40s implies that the saver must have saved an amount equivalent to 30 times the annual expenditure. Now the key question is how can one do this.
From the age of 30, your annual savings should be nearly 70 percent of total earnings. The rationale behind this is to save more than double the expenses. This way, you are saving for two years with every passing year while leaving out a 10 percent margin for inflation, contingencies and other sundry uncertainties.
So, if your annual expense is ₹10 lakh. Then you must be earning ₹32 lakh (after tax) so that you can 70 percent of it to be able to save ₹22 lakh, which is nearly 10 percent more than the two-year expenses:
(10X2) + (10% X 20) = 20 + 2 = ₹22 lakh.
The remaining 30 percent of 32 lakh is ₹9.6 lakh or nearly ₹10 lakh — which you can spend.
If you continue to save at this pace, then in the next 15 years, you can build a portfolio that will last for more than double the number of years you saved for i.e. 30.
However, in the latter parts of your career, your income is likely to increase and you can save faster than at this pace. That can be seen as an extra income to set off an unexpected expenditure.
Another thing which is key to investing wisely is that the retirement fund that you are accumulating must be invested in safe and liquid investment options that offer a maximum rate of interest.
The experts suggest that the portfolio ought to have nearly 60 to 70 percent invested into equity and the remainder in bonds. But the ratio should reverse to 30 percent for equity and 70 percent for bonds towards your retirement.
After having retired, care must be taken to not withdraw more than 3 percent of the portfolio in one year. The remaining balance should remain invested for the fund to grow further. At this pace, the portfolio will last for at least 33 years with a hypothetical assumption that the portfolio will not appreciate. Considering that the fund will continue to appreciate (faster than inflation) in more than three decades of staying invested, it will not run out during the retiree’s lifetime.
FIRE follower should keep in mind the following points if they are planning to retire at 45:
1. Save a lot: If you plan to lead a retired life for 30 years, then you must be able to save 70 percent of your income for at least 15 years, while the remaining 30 percent should be adequate to cover your expenses.
2. Medical cover: You must stay covered by a generous medical insurance plan so that a sudden medical bill does not jeopardise your investment plan.
3. Be realistic: Remember that your saving pattern aligns with that of your expenditure. So, after retirement your way of life will be almost similar to your quality of life before you hang up your boots.
4. Extra for vacations: If you want to lead a luxurious life after retirement with a healthy dose of travel and recreation then you can add to your income by working extra so that you can save for some vacations as well in your post-work life.
5. Discipline: Consistency and discipline are the keys to an early retirement. If you waver once, you are likely to renege the next time. So, stick to your saving and investment plan religiously.
6. Withdrawal rate: Once you have created a sizable fortune in 15 years, you can start to withdraw at the rate of 3 percent each year, while the remaining portion of the fund can stay invested – which will allow the fund to grow manifold in 30 years. This way, the fund will never run out during the lifetime.
So, one must remember that retiring early is not one financial plan. In fact, it is a blend of strategies that cumulatively can help you deliver one big goal – to retire early. As life expectancies are rising and working lives shortening, the corpus required to ensure an early retirement ought to be colossal.