Everybody wants to become financially independent. But very few actually get there.
There can be various reasons but I think that achieving something like Financial Freedom doesn’t just happen. It requires one to have a serious plan and more importantly, then commit to that plan. And that’s easier said than done.
Personally, I aim to achieve early financial independence.
If you were to ask me why then I will quote Charlie Munger – I did not intend to get rich. I just wanted to get independent.
And that for me is a goal worth having. But let’s not discuss my thoughts. I have already written about it in detail at F.I.R.E.
Let’s rather talk about you.
If you are beginning to get comfortable with the whole idea of financial independence or early retirement, then I am sure you would be wondering How much money do I need to Retire Early In India? Or how much is enough for Financial Independence & Retire Early (FIRE) in India?
It would be best to have a perfect formula for financial independence.
But there isn’t any.
Getting the right amount for regular retirement is a tough nut to crack in itself. And here, we are talking about early retirement. 🙂
But there are thumb rules that can get you going.
A popular one is – having a corpus equal to atleast 25 times your annual expenses.
This may be enough for some people but may not be for many others. For some 30X or 40X may be a more appropriate size. It depends on a variety of factors like current age, age of early retirement, life expectancy assumption, inflation % assumption before and after retirement, return estimates before and after early retirement and several other more serious factors like the sequence of returns risk, etc.
But as I said, if you are just beginning your journey – then the exact accuracy doesn’t matter and you can have atleast some target in front of you – which I think is a good one provided by the 25X, where X is your annual expenses.
You will, in any case, require several years to reach that first. 🙂 So relax about the accuracy a bit.
But as you get closer to your goal and/or the portfolio size grows, you need to run numbers more carefully and have additional buffers to make your early retirement plan more robust. And if it sadly means delaying it by a few years or saving more, then so be it. Better be safe than sorry when you are older.
So 25X is a good aim to have.
But what about the ‘secret’ that I mentioned in the title of this post?
Here it is…
If the X (i.e. Annual Expense) is small, you can save more and, in turn, reach the target of 25X faster.
Read that again.
And again if you are still unable to understand its importance.
Let’s take a small hypothetical example to make this idea crystal clear:
Suppose your annual income is Rs 12 lac. And your annual expenses (i.e. X) are Rs 8 lac.
So if we were to use the 25X thumb rule, then you would need 25 times Rs 8 lac – which is Rs 2 Cr as Early Retirement Corpus. And to achieve it, you will have Rs 4 lac every year (Rs 12 lac income minus Rs 8 lac expenses) to save for the goal.
Note – I have ignored inflation, etc. for simplicity here.
Now remember what I said earlier – If the X (i.e. Annual Expense) is smallER, you can save more and in turn, reach the target of 25X faster.
So let’s make the X a little smallER.
Your annual income is Rs 12 lac. And your smallER annual expenses (i.e. X) are Rs 6 lac (reduced from Rs 8 lac earlier).
Now if we use the 25X thumb rule, then you would need 25 times Rs 6 lac – which is Rs 1.5 Cr as Early Retirement Corpus. And more importantly, to reach it you will have a higher Rs 6 lac every year (Rs 12 lac income minus Rs 6 lac expenses) to save for the goal.
So the target has reduced from Rs 2 Cr to Rs 1.5 Cr. And you also have a higher amount of Rs 6 lac per year (instead of Rs 4 lac) to save for the goal.
So it’s a double benefit of having a reduced target and higher savings capability.
Decreasing your expenses (I know its tough) increases the potential to increase the savings – this fact alongwith lower target requirement can potentially accelerate your plan to reach the final corpus earlier.
Think of it like this – If your expenses are low, you will need a smaller corpus to support it for years to come. And a smaller corpus means that you will require a lesser number of years to achieve it. But if your expenses are high, then not only will your required corpus would be high, but it will also require more time and probably a higher saving rate.
And this is the real secret!
Remember – this 25X figure is just a thumb rule.
And you also need to understand the risks that such thumb rules or any early retirement plan is exposed to – like sequence of return risk, unexpected and unplanned expenses, living longer than you estimated(!), extremely high inflation in retirement years, high medical expenses inflation that isn’t covered by your health cover, etc.
The actual number will be different for different people and circumstances.
The idea here was to show that higher your saving rate, the sooner you can potentially retire.
If you save just 10% of your income, then you can forget about early retirement. You need to save a lot more – like 30, 40 or even more than 50%. I am able to do more than 50% as I aim to achieve financial freedom by 40. Fingers crossed. 🙂
So that was about the simple thumb rule for computing how much money do I require for financial independence and early retirement (FIRE).
I like to talk about financial independence on Stable Investor quite regularly. It is one of the big financial goals I have. But I must also warn you – the maths of FI is such that you can speed up the theoretical goal achievement if you reduce expenses by a lot. But then, that would mean you are sacrificing your present for the future, which is good to an extent but not beyond it.
We always know how much money we have but we never know how much time we have. So we cannot entirely sacrifice the present.
Financial independence is a difficult goal which most people won’t achieve.
But even if you were to achieve it partially, even then it would provide you with a lot of control over your financial life. A solid early retirement corpus with reasonable return expectations will cover basic living expenses for longer than your life expectancy. That’s a good achievement no matter when you achieve it.
I still feel that aiming for some degree of financial independence (and not early retirement) via a high saving rate is a fantastic goal for most people. More so for those who see real threats to their jobs in near future. You never know when you might be forced to retire early & involuntarily.
At the same time, I recognize that not everyone is eager to achieve early retirement. And there are also people who like their luxuries. And that is fine as it gives them happiness.
The bottom line is that your goals are unique and you need to do what is necessary to achieve your financial goals. If financial independence is not one of them, then you can ignore it. But if it is and it’s more than a passing wish, then you need to do something about it. The independence that a big corpus provides is amazing. It even gives you that magical ability to say F*** Y** to anyone without thinking too much about the consequences. 🙂
Imagine that kind of freedom!
So if you are planning early retirement in India, then sit up and take action. Just wishing and asking questions like how much money I need to retire early in India will not be enough.
Well said Dev Ashish.
Even aspiring for partial financial freedom (which can allows you good flexibility in profession) can be a good goal to aspire for. And achieving, that is more than just doing the math – it is a lot about how you can control your behavior and emotions – and thus attitude towards money.
Very well written Dev !