Retirement: Do you dream of early retirement at 40? Let’s do the math

In the words of Morgan Housel, “The greatest intrinsic value of money – and this cannot be overstated – is its ability to give you control over your time.” Whenever we think of having financial independence to have complete control over our time, it is invariably associated with retirement.

But it doesn’t have to. Financial independence and early retirement can be quite flexible concepts when viewed from a different angle. Instead of thinking that retiring at 40 means never having to work again, a more flexible way might be to ask – How many years of independence can I fund for myself at 40 and to what extent ?

What do you want to do with your financial independence?

Thinking about this honestly is perhaps the most important step towards your financial independence. Do you see yourself starting your own business? Do you want to take a year or two and travel the world and start your career over? Or do you want to return to your hometown, reduce your cost of living and start your own business? It could be anything else, but the fact is that it can help you better set a realistic goal and therefore consider the degree of expense to be expected.

Analyze your expenses

Differentiate between needs, wants, and wants, and identify the expenses you’d like to keep during a time when you expect a lower, less stable income at age 40. A good place to start is to track your current monthly expenses. This can be automated if you use a money management app that can track and categorize your spending across all your bank accounts using the account aggregation framework. You may also want to consider additional life stage expenses such as new dependents, healthcare expenses, and major lifestyle changes you may make as you approach your birthday. target age.

Work on the math!

There is no overall figure that everyone should aim for, it depends on your choices and expectations. If you use online financial planning calculators, it won’t be too difficult to figure out the corpus you’ll need to achieve financial independence. A better way to understand this is to see how various choices can affect a 23-year-old just starting his career.

Both Karan and Alisha placed in the same company with a monthly income of ₹1 lakh per month, their basic expenses are ₹40,000 per month. Now they both want to be financially independent at 40, but for totally different reasons.

Alisha wants to build a substantial corpus so that she can try her hand at creating her own business. If that doesn’t work out, she can always go back to paid employment, but she wants to be prepared for the ups and downs. She needs to build a reserve for 5-7 years, but doesn’t want to dip into her retirement savings in her PF and NPS accounts. Here, we assume that due to life stage changes, she is likely to incur double her current expenses. This is beyond inflation, which has been factored into these calculations at 6% per year.

Despite all these factors, his is a relatively easy goal to achieve. By investing around ₹25,000 each month with an annual increase of 6%, she can easily fund a corpus of ₹2.3 to 40 crore.

Karan, meanwhile, wishes to return to his hometown and spend time with his family – a kind of partial retirement. His savings will be the main source of income after age 40, which he will use to support his family for at least 30 years. Since Karan has a minimalist lifestyle, we assume that his basic expenses will only increase by 1.5 times due to the life stage beyond inflation. He will have to invest around ₹40,000 every month and increase this amount by 12% every year to build a corpus of ₹6 crore.

Is it even possible to fully retire at 40?

It’s hard! In the previous case, if Karan wanted to live the rest of his life (assuming till 80) with no income other than his savings, he would have to invest around ₹60,000 per month and increase it by 15% every year. This leaves no room for error and may not be realistic.

Moreover, the average life expectancy in India has increased from 61 years in 2000 to 69 years in 2022. Accessibility to better health care will go even further and bring it closer to the average of developed countries from 78 to 80 year. If one intends to retire relying entirely on one’s savings, planning for 40 years of freedom is impractical for most people.

As these variables can change drastically over decades and completely derail your assumptions, a good way to approach early retirement is to take a flexible approach. Simply fund your financial independence for as many years as possible in case you run into an obstacle. It won’t hurt if you put off your early retirement plan for a few more years.

(The author, Praneet Battina, is part of the investment team, Fi Money)


Comments are closed.