I am a 35-year-old male and I am not married yet. I am keen to know whether it is logical and feasible to opt for early retirement looking at the uncertain markets. If I want to retire by 2030, how should I save with just five years left?
Name withheld.
Reply by Vijay Kuppa – CEO, InCred Money
Financial Independence/Retiring Early (FI/RE) is a popular money management approach gaining popularity across the nation. The concept is straightforward: increase your income, decrease your expenses, and utilize your savings wisely. Start by establishing a sturdy financial foundation with your savings, and then allocate them towards investing for your future. By following this method, you can work towards achieving financial freedom and taking charge of your own destiny.
The FIRE movement emphasises the importance of substantial savings and high-yield investments to enable individuals to retire earlier than typical retirement plans allow. The central idea is to achieve this goal by meticulous planning, strict budgeting, and strategic investment decisions. Ultimately, the size of one’s investment portfolio is the primary factor determining when early retirement can be realistically attained.
1. How to achieve Financial Independence, Retire Early (FIRE)
The first and most important step in the FIRE journey is recognizing that the goal is not just to retire early but to achieve financial independence. This means having enough wealth to sustain your lifestyle without actively earning. Financial independence provides freedom and flexibility, allowing you to choose whether or not to work.
To achieve FIRE, you must first estimate your financial target. A general formula to calculate this is: (Number of years in retirement) x (annual expenses at retirement, adjusted for inflation). For example, if you plan to retire in 30 years and your current annual expenses are Rs 10 lakh, your FIRE target would be Rs 3 crore, considering no changes in spending patterns. This target can then be refined based on life expectancy, inflation, and personal goals.
Once you have a clear target, calculate the monthly investment required to reach it. This involves projecting the inflation-adjusted expenses at retirement and determining the corpus needed to generate sufficient income. Based on this, calculate the monthly savings needed by considering the time available to invest and the expected returns from a balanced portfolio of equities and debt.
A diversified investment strategy is essential for reaching FIRE. Allocate funds to equities for long-term growth and to debt instruments for stability. Depending on your risk appetite, you may also consider other assets like bonds, real estate, etc. It’s crucial to start early, as compounding plays a significant role in growing your wealth over time.
Finally, regularly monitor and rebalance your portfolio to stay aligned with your financial goals. Life circumstances and market conditions can change, so reviewing your progress and adjusting your plan annually is essential. As you approach your FIRE target, gradually shift your portfolio to income-generating assets, such as bonds or dividend-paying stocks, to ensure a steady post-retirement income.
Achieving FIRE is a systematic process that requires discipline, strategic planning, and consistent execution
2. How to plan your finances with just 5 years to your planned retirement
If you want to retire by 2030, the first and most important step in your FIRE journey is recognizing that the goal is not just to retire early but to achieve financial independence. This means having enough wealth to sustain your lifestyle without relying on active income. Financial independence provides the flexibility to live life on your terms, whether or not you choose to work.
Let’s calculate an estimated savings target based on the following assumptions:
● You are currently 35 years old and aim to retire by 40.
● Your current monthly expenses amount to Rs 50,000.
● You wish to maintain the same standard of living throughout your retirement.
● Your life expectancy is 80 years, and your spouse is the same age, resulting in a retirement duration of 40 years.
● Assuming an inflation rate of 5%, your monthly expenses in five years would increase to approximately Rs 64,000 per month.
● To sustain this inflation-adjusted amount for 40 years, you would need a corpus of approximately Rs 2.5 crore.
To achieve this corpus within the next five years, assuming a 9% annual return on investments from a balanced mix of equity and debt, you would need to invest approximately ~ Rs 3.3 lakh per month. This aggressive savings rate highlights the challenge of achieving FIRE within such a short timeline.
Keep in mind, that this is a simplified estimation. Real-life financial planning requires considering other critical factors, such as family planning, children’s education, medical emergencies, and other personal goals and ambitions. Additionally, this estimate does not include contingencies or potential changes in lifestyle or spending patterns.
Achieving financial independence in a limited timeframe requires significant adjustments in your current financial habits. It involves maximizing your savings rate, investing in high-growth instruments, and being disciplined about spending. Regularly reviewing your progress and consulting a financial advisor can also help refine your plan and account for unforeseen variables. Remember, financial independence is a journey that requires a holistic view of your life and financial goals, beyond just hitting a target corpus.