In our traditional society, 60 years used to be considered the standard retirement age. However, in recent times, an increasing number of individuals are challenging this age limit by opting for early retirement. Many experts advocate for the pursuit of financial independence, known as FIRE (Financial Independence, Retire Early), with the goal of retiring much earlier than the norm, perhaps even in one’s 30s or 40s. Achieving this ambition requires significant savings and substantial financial sacrifices.
To plan for early retirement, it is essential to establish financial stability that can support your needs throughout your lifetime. Make informed investment choices to build a sufficient corpus and generate a consistent income stream. Commence investing early to allow ample time for your investments to grow.
A reader from the United States contacted Business Today with a query. The reader, 32 years old and unmarried, stated that he had no plans for marriage or children in the foreseeable future. He disclosed that 55% of his funds were invested in the US stock market, with the remaining 45% in liquid funds.
The reader inquired whether earning Rs 70,000 per month upon relocating to India would suffice. He explained, “I lead a modest lifestyle in the US and aim to return to India, traveling within the country every 3-4 months. Am I on the right track with my investments and future plans?”
We spoke to Chirag Muni, Executive Director, Anand Rathi Wealth Limited who shared his tips on financial planning and early retirement.
“Say you are 32 year old and considering retiring today with a corpus of Rs 2,00,00,000. With monthly expenses expected to be around Rs 70,000, your withdrawal rate would be approximately 4%. By investing in an 70:30 equity-to-debt ratio, you could aim for a long-term return of around 11%. This approach accounts for inflation, which is expected to average around 6% per year in India, meaning your annual expenses will gradually rise,” Muni said.
“For example, if you need Rs 8.4 lakh in the first year, you would require Rs 8.9 lakh in the next. At 4% withdrawal rate on current corpus with 11% return and 6% inflation impacting your expenses you will still be able to earn decent returns to grow your portfolio,” he added.
“This strategy allows you to grow your portfolio while managing day-to-day expenses over the next 60 years. However, it would require maintaining a disciplined lifestyle, securing an emergency fund, and arranging comprehensive health insurance to take care of contingencies,” he further said.
Financial plan
Muni shared that the investor can diversifying into active mutual funds across categories such as large-cap, mid-cap, small-cap, multi-cap, contra, and value funds to build his corpus.
“For your equity portfolio, consider diversifying into active mutual funds across categories such as large-cap, mid-cap, small-cap, multi-cap, contra, and value funds. This spread can give exposure to various sectors and help navigate different market cycles. Also, keep in mind to maintain 55% exposure to large cap fund and rest in mid and small cap. For the debt portion, arbitrage funds with equity-like taxation are a beneficial choice. Annually, plan to transfer funds from equity and debt into liquid funds via a STP while keeping the 70:30 allocation intact,” Muni said.
The FIRE financial strategy focuses on achieving early retirement as its main objective. This strategy emphasizes key aspects including:
Increased Savings: This early retirement plan places a high priority on saving money. In order to fully embrace the FIRE strategy, individuals are encouraged to save between 50% to 70% of their income. It is also advised that individuals save even more if feasible.
Frugal Lifestyle: In order to maximize savings, it is crucial to adopt a frugal way of living. This involves prioritizing essential expenses and savings over discretionary spending. By following this approach, individuals can save a significant amount of money.
Strategic Investments: The funds saved through the aforementioned methods should be carefully invested to not only protect capital but also to achieve capital growth and wealth accumulation before reaching the desired retirement age.