Ashish, a 26-year-old Delhiite, is a financial advisor in a multinational company that offers financial solutions to business houses globally.
Being a traveloholic, Ashish loves to take short breaks every couple of months. This is where his post-retirement goal of being a globetrotter has stemmed.
He wishes to take retirement from his active job by 40 and then travel the world. To fulfil his dream, he needs two things: Money and Fitness.
There could be many millennials or post-millennials who also think like Ashish and wish to retire by 40. You could have entrepreneurial goals post 40 or following your passion!
So, if you are also in your 20s and have similar aspirations, do read on to know how you can build your financial portfolio in the next 15-20 years.
PS: You need to actively take care of your health to be able to enjoy your post-retirement life, though!
Early Retirement Planning – a New Concept
Ashish’s father, like many Indian parents, does not really understand why Ashish wants to retire early.
He often mentions his own story to Ashish and proudly tells him that at the age of 58 when he was all set to retire from his post as a bank manager in a national bank, he got a 2-year extension. It was one of the happiest days of his life.
This phenomenon of getting a job extension is not new to us.
Most of us have seen our parents slogging and working hard till the workplace forces them to hang their boots. The most predominant idea in our parent’s mind is to work for as long as you can and retire as late as possible.
An idea that automatically is passed on to us, the current generation.
And thus, it is quite obvious that the notion of early retirement is not of Indian origin. Most people believe that it is a ripple effect of the FIRE movement that started in the United States of America.
The full form of FIRE being – Financially Independent Retire Early.
What Makes Financial Independence so Important?
When we speak about early retirement, financial independence is a key element. Not being able to be independent financially would make it almost impossible to retire early.
In simple words, you are financially independent when rather than you working for money, money works for you.
Let us take a look at the 2 major aspects of financial independence.
1) Active and Passive Income
When we talk about financial independence, we need to have an active and passive income. Active income refers to the money that you earn with your hard work, through your work or your job.
Passive income on the other hand, as the name suggests, is passive. You can get passive income without having to work. You can also say that when you are financially independent, you don’t work for money, rather your money works for you.
For example, the money that you have in the bank fetches you an interest. For this interest, you did not have to make any extra effort.
Let me explain with another example, if you rent out a piece of property, the rent that you get is your passive income. And so, it is your money which is working hard to get you more money.
2) Other Income Sources
In order to consider yourself to be financially independent, you would have to be at a stage where your passive income is much more than your active income.
This stage can be reached when you do not really need your 9 to 5 job and you are not dependent on your salary to manage your expenses.
You earn enough through commissions, brokerage etc. and with these sources of income, your bank balance will always be brimming.
How Can I be Financially Independent?
According to financial experts, there are three major elements that can support you in your goal of being financially independent.
Let us take a look at them:
1) Aggressive Savings
Most of the people who work today generally have a 50-30-20 Income rule, where they spend 50% of their income on their needs.
These are the most basic needs which are crucial to lead life, such as your house rent, food supplies, healthcare etc. 30% of the income is kept for your desires and wants.
These wants are not really a requirement, but because you like them you want them.
For example, you have a number of shirts, but in a shop, you see one that you really like. Now, even when you don’t really need it, buying it is your expense. The remaining 20% is used as a saving, to be used in the future, in the time of an emergency.
However, to plan an early retirement, you can’t really make use of this old 50-30-20 rule, rather you need an extreme way of saving. It is recommended that you save at least 50% to 70% of what you earn.
2) ‘Frugality’ is the Word
When you want to practice extreme savings you simply cannot afford to be a spendthrift, rather, you need to cut down your expenses on just about everything.
Small everyday savings can go a long way, avoiding fancy restaurants, going on a shopping spree, buying expensive gadgets is a Big No.
The crux is that you need to live on the bare minimum. You would have to sacrifice a lot more and keep your everyday desires and lures under check.
Rather than following the formula Savings= Income-Expenditure, follow the magical formula, Expenditure= Income-Savings.
Let me give you another example of being frugal: suppose your need to buy a new phone, so rather than splurging on a phone that costs over 50K, you can also settle for one that costs about 10-12k. Ultimately, you are going to use it for the exact same features.
Spending only on the things that you really need is paramount. So the next time you feel tempted to swipe your cash card, stop and think. And then think a little more.
3) Enough Passive Income
The basic difference between a rich man and a common man is passive income. It is the secret of not just becoming rich but also staying rich. For someone who is not able to create enough to manage his expenses, may not be in a position to retire by 40.
When you start generating enough passive income, it is probably one of the first signs that you are nearing your goal of financial independence.
- Your rental income is probably the best way to earn passive income. However, having property to be rented out is itself a costly affair.
- In case you do not have a property to rent, you have other options such as dividend income that can be generated through stocks.
- Bank deposits are a great way to earn instant passive income
Everyone has the ability to earn passive income, however, the idea has to come from you, depending on the resources you have.
For those of you who have a lot of responsibilities on your shoulders and cannot save 70% of your earnings, FIRE also has the concept of Barista FIRE.
Here, you save as much as you can and build a corpus big enough that allows you to retire from your 9 to 5 job at an early stage.
But, you still continue to work on a freelance basis, work part-time or pursue your dream job/ start-up/ career.
So, basically, you work hard and save harder till your late 20’s and then with the help of this saved corpus or/and if you are lucky along with the help of your parents/ family you will be able to build a platform for yourself from where you can make your start-up take-off.
If your business plan hits the jackpot and turns into a big success you would again be able to retire by the time you reach your late 30’s or max 40.
How Much Money Do I Need to Retire Early?
The concept of “FIRE” is American, and so for people in India, doing the same things as Americans would neither be possible nor useful. You have got to make the necessary alterations to suit your requirements as well as objectives.
So while doing your retirement planning, one of the first things that you need to do is to find out the answer to the question ‘how much should I save for retirement in India’ and for this you need to have a TRA, Target Retirement Amount.
Now to help you calculate this amount, FIRE gives you this simple formula:
Retirement Amount = 25 times your Annual Expenses
Let’s say that your expense in a year is around INR 10 lakhs, so you need to aim at a retirement amount of a minimum of INR 2.5 crores.
So, you need to be able to build a corpus as big as this amount to think about early retirement.
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How to Prepare for Retirement before 40?
Retirement Planning becomes easier when you charter a course at the right time.
Here are top 11 things that you can do, to keep yourself on track. Let us take a look:
1) The Right Career
If you are still in your early 20’s you need to put a lot of thought into what it is that you really want to do. Starting early will help you speed up reaching your goal.
Weigh the pros and cons of whatever it is that you wish to do and move ahead. A family business, your own start-up, setting up a business or even a 9 to 5 job, make a plan and then focus on the execution.
2) Estimate Your Post Retirement Expenses
This is probably the first rung of the ladder. When you want to retire early and are thinking about how to prepare for retirement, the first thing that you need to do is calculate the “how much” would you need on a monthly basis.
An ideal situation would be that you enter your retirement period debt-free, however, you would have to cater to rent, grocery, clothing, transport, travel, utilities, insurance premiums and healthcare.
3) An Emergency Fund
Be it before or after your retirement, having an emergency fund is crucial. Life is unpredictable and ups and downs are its part and parcel.
Your budget may alter in different phases of retirement, at the same time you need to keep a separate fund in case of a medical emergency or a financial family commitment.
4) Strategically Budgeting
Making a budget is easy, sticking to it requires strict discipline. You would have to earn more and spend less. We have already spoken about frugality and its importance.
You would have to clearly differentiate between your needs and your wants and then make a saving strategy.
5) Bank The Extra Cash
Though most of us rely on plastic money and prefer making cashless transactions, still putting the extra cash that you get in the form of gifts should be put in the bank straight away.
These small additions to your savings account fetch you interest and thus, can go a long way too.
6) Find More Ways To Save
Apart from living on 30-40% of your income, it would be a great advantage if you can explore more ways of earning an extra buck. Depending on your job profile, see if you can work overtime or find a part-time job.
Take tuitions, work on commission, make investments, just about anything that works for you.
7) Seek Professional Help
Another important aspect is choosing relevant saving vehicles that would allow you to save more in a shorter period of time. For this, you can always seek the help of a financial advisor.
A professional would be able to help you in designing a road map and also developing an investment strategy that works for you. The plan would help you reach your goal in a more systematic way.
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8) Minimize the Debt
One more key element in being financially independent is to keep a very minimal debt as you enter your retirement period.
If you find you too tempted to use your credit card for every small thing, better to discard it.
9) Insurance is Important
All your savings can go down the drain if you are stuck with a medical emergency. With sky-rocketing healthcare services, hospitalisation can bite a big chunk from your savings.
Having a comprehensive health insurance policy can greatly help you secure your savings.
It is also imperative that you buy a life cover so that even if something happens to you, your family would be able to deal with a financial setback.
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10) Check Yourself Through Smaller Objectives
You also need to estimate the growth of your savings. Making short-term goals would help you in getting a fair and honest picture of whether the ‘Goal of Retiring early’ that you have made for yourself is within your reach or not.
Set a monthly saving goal, and gradually go to half-yearly and yearly goals. If you are able to reach your set limit, you can consider that you are on the right track.
11) A Back-Up Plan
Stay positive and work towards your goal, but at the same time be realistic and always have Plan-B.
By putting all your emotional eggs in one basket, you may be heartbroken if ‘early retirement’ doesn’t happen for you.
Early Retirement – Do You Really Want It?
The idea of early retirement can be very appealing, but, most of the time youngsters are drastically underprepared for the same. Though, there are many who are prepping up to shed their 9to5 gig as early as possible.
And though this can be seen predominating the US, to do so in India, you need to really think it through.
If you are someone who is already in your dream job/ or are doing something that you are passionate about, early retirement might not be the right option for you.
For example, if you are a school teacher who loves teaching and interacting with young ones, you may not really want to retire. Forget about retiring at 40, you may want to keep teaching beyond 60 too!
However, if you are someone who has Monday Blues on a weekly basis and often finds yourself stuck in a career that you resent, then you may want to call it quits.
But even if you begrudge your job, does that leave retirement as the only option.
Explore the options of changing your vocation even if it means having to start from scratch or taking a sabbatical or acquiring a new skill-set.
Having a broader outlook might offer you a better and wiser choice.
The Bottom Line
Retiring early may seem a distant dream, but it sure is possible. However, you cannot do it without having a very clear road map in front of you.
And thus, it requires a lot of planning and aggressive saving. Remember, it is never too soon to begin mapping and saving for your retirement. The day you get your first paycheque is probably the best day.
You would have to be proactive and very disciplined in your approach. In a time when you can shop online sitting in your cosy bed, not being lured by Big Sales and Deals might be a little too difficult.
If you are really good at stalled gratification and can seize every opportunity to save more and more.
There must be a lot of people who would want to retire early. After all who wouldn’t want to sit back and relax. However, keep in mind that if you aim to retire early, it would require a lot of preparation.
Every small expense, saving would have an effect on how early you can reach your goal.
But, with the right plan and hard work you would surely be able to say sayonara to your workplace and retire at 40, and then as they say “After climbing the mountain, you can finally enjoy the view”.
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