Recently, my wife showed me an interesting tweet (link):
Overrated: How fast you are able to reach financial independence.
Underrated: How enjoyable is your journey on way to financial independence.
I was like wow! This makes sense.
She was quick to remind me then that she had said something very similar a few years back! J And interestingly, I had even written about this exact idea in a post titled F.I.R.E. = Financial Independence and Retiring Early. So here I reproduce a part of it for context:
…I was trying to talk to her [my wife] about the rationale of early retirement and she said something that hit me like a bullet.
She told me that in order to achieve my destination quickly, I should not screw up the journey.
[in years leading up to that discussion with my wife], I was increasingly becoming addicted to the idea of investing more and more to accelerate my financial independence (or early retirement). This meant that I was quite reluctant in spending money even on things that were worth spending on.
And this was wrong on my part. Goal achievement (atleast this one) should not be at the cost of killing the joy of several-years long journey.
You can continue to lead a ultra frugal life and hoard tons of money when you are 45 or 50 or whatever. But, will you be able to use that money in ways that would have been possible when you were young?
So maybe, I am not saving as much as I actually can if I push myself more. But that is fine with me even if it means that my so-called ‘early’ retirement will be delayed by a few years. 🙂
Coming back to the original tweet:
Overrated: How fast you are able to reach financial independence.
Underrated: How enjoyable is your journey on the way to financial independence.
Ofcourse fast is quantifiable and enjoyable isn’t. But hopefully, now you understand why it’s worth comparing the two in the context of financial independence.
And let me add a bit of numbers to this discussion to drive home the point better…
Don’t worry. It’s not complex maths. Just simple stuff – understand the basic maths behind financial independence first:
As per a popular FIRE thumb rule, you need a corpus equal to atleast 25* times annual expenses for financial independence.
* – Many say that having 30X or 40X may be a more appropriate and safer approach. But let’s stick to 25X for simplicity and discussion sake.
Now if the X (which is the annual expense) is small, that means you can save more and in turn reach 25X faster.
Read on (and this is important)…
Suppose your annual income is Rs 12 lac. And your annual expenses (i.e. X) are Rs 8 lac. So using 25X thumb rule, you need 25 times Rs 8 lac – which is Rs 2 Cr as the Financial Independence Corpus. And to achieve it, you have Rs 4 lac every year (Rs 12 lac income minus Rs 8 lac expenses) to save for the goal.
Note – Ignore inflation, etc. for simplicity.
Now let’s make the X a little smallER.
Your annual income is still Rs 12 lac. But now, your annual expenses (i.e. X) is smallER at Rs 6 lac (reduced from Rs 8 lac earlier). Now using the 25X rule, you would need 25 times Rs 6 lac – which is Rs 1.5 Cr as the Financial Independence Corpus. More importantly, you now 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. Obviously, the time required to reach the target would reduce too. And this is How to really Accelerate your Financial Independence.
Lowering expenses has the double benefit of reducing the target and increasing your savings capability to achieve that reduced target.
Think of it like this – If your expenses are low, you 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.
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.
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.
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.
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.
You too may not be considering early retirement. But it makes a lot of sense to prepare for it anyway.
Life isn’t fair (you know it) and is also unpredictable. It doesn’t always go the way we expect it too. And your actual retirement age may be much lower than your expected retirement age.
You never know when you might be forced out of job due to the availability of easily replaceable cheaper employees, technological disruption, a collapse of the industry you are part of, your inability to remain relevant to the profile, etc. Imagine your situation if after several years of work, you are ejected out of your role/company and unfortunately, are then too old to be considered for other roles. Or in other words, you are unemployable. That’s a tough situation to be in when not young.
And these are just some of the reasons. There can be several more. Job losses are a reality. Reasons can be many.
As the dynamics of employment across sector changes, most careers are becoming increasingly stressful. Who knows how long you can tolerate such stress levels? You may eventually consider taking early retirement due to high-stress levels in your job. That’s possible and is happening.
Leave stress. Other health ailments or serious injuries can also sideline your career abruptly.
And it is not just about you alone. A serious illness of parents, spouse or children may require (force) you to be actively involved in their treatment – which may make it difficult to continue your current job. You then have this difficult task of earning as well as taking care of them. At this point, you may have to either reduce your workload or even quit your job for some time.
In all the above cases, your ability to cope with the situation would be better if you have savings to fall back to. Pursuing financial independence or early retirement can reduce your hardships, atleast to some extent, if your working years are cut short for reasons outside your control.
Even if you don’t want to prepare for early retirement, you should prepare for involuntary early retirement.
This is like having a Plan-B to ensure that life doesn’t f*** you.
You may be young today and not want to retire before 60. But when you turn 50 and are fed up of your job, then having a large corpus will give you the option of calling it quits and relaxing for the rest of your life. And that’s a great option to have.
Preparing for early retirement acts as an advanced preparation for normal retirement. It fast-forwards your retirement savings. And this front-loading of retirement savings creates an insurmountable advantage due to compounding that you will thank yourself in later years for.
And failure isn’t a bad outcome here. Even if you fail to reach the right corpus for early retirement, you will still be better off than if you didn’t attempt to pursue it at all.
I know many of you feel that early retirement is not real and there is no point pursuing it. But it is real. Maybe you don’t want to retire early at this point in your life. But who knows you might change your mind after a few years. Life can surprise.
But I must tell you that planning to retire early requires planning, discipline, high savings rate and proper management of your investments. It’s not easy. But as explained earlier, it helps to have tons of money when life is planning to surprise you unexpectedly.
Life comes with uncertainty. But if you plan well, this uncertainty doesn’t necessarily have to result in insecurity.
So do think about it. And if you feel what I am saying makes sense, then start preparing for early retirement even if it is not your immediate goal.
The words like Financial Independence, Early Retirement and Financial Freedom are slowly but surely finding a way into the thoughts and vocabulary of us Indians.
Their numbers are still very small but surely, there are people who are not just asking ‘How much is enough to retire in India?’ – Instead, they are asking ‘How much is enough to Retire Early in India?’
The interest is definitely there as I myself got some coverage in leading Indian newspapers for aiming for financial independence (here and here).
Regular retirement vs Early retirement – some people are considering the latter. 🙂 And to be honest, it’s not hard to understand the appeal of early retirement or financial independence. Just ask this question a little loudly – How much money is enough to never work again in India? It sounds nice and liberating. Isn’t it?
I regularly receive questions like these on mail from readers – How much money is enough to retire at 40 in India? How much money is enough to retire at 45 in India? How much money is enough to retire at 50 in India?
In this post, I wanted to address the difference between Financial Independence, Early Retirement and Financial freedom as I see it. People use these terms interchangeably. But there are some differences.
I must also tell you that there are no perfect definitions here. So you can interpret these words as you like – as long as it helps you achieve what you are aiming for.
Difference between Financial Independence Vs Early Retirement
Financial independence and Early Retirement are 2 different things, but which are linked to each other in a way.
So let me try to explain it simply.
Financial Independence means having enough assets (or/and income generating assets) that you do not have to work for money again. Now here is the important part – you may still decide to continue doing what you are doing even after achieving Financial Independence.
Early Retirement, on the other hand, means actually retiring (and doing almost no income-generating work) because you have achieved Financial Independence.
For obvious reasons, if you plan to retire early and never work again, then you will need a much larger corpus than if you were to be simply financially independent.
Together, both FI (Financial Independence) and Early Retirement (RE) are referred to as F.I.R.E. but remember that there is a subtle difference between financial independence and early retirement.
That brings me to another aspect of FIRE.
Different Types of FIRE (Financial Independence Early Retirement)
One of the main questions when it comes to FIRE is ‘How much do I need to retire early?’
As you might have guessed, the answer is different for different people.
People’s lifestyles, their spending habits, financial situations, their real ability to take risks and several other factors influence their perception of how much might be enough for retirement. And therefore, the amount needed to achieve FIRE is different for everyone. But still, there are two major types of FIRE that people use as references:
LEAN Fire – This is a low-cost approach to FIRE. The idea is to reduce your expenses to the bare minimum (become ultra frugal) and achieve FIRE as soon as possible. It’s about having a life rich on time but short on luxuries. Lower the expenses, lower will be the FIRE corpus needed and sooner one can achieve it. That’s the logic here. For people targeting LEAN Fire, achieving the freedom at the earliest possible age is the most important factor.
FAT Fire – This is at the opposite end to LEAN Fire on the spectrum of FIRE. The goal is to retire early but not at the cost of quality. People who aim for FAT Fire also want to achieve it in a way so as to have enough for a better lifestyle. The corpus required for this is higher than LEAN Fire.
Both of these approaches are at the opposite ends. And it’s a matter of personal choice as to which one is better suited for whom.
In fact, there are no strict definitions. You can even label the levels in between as FIRE Level 1, FIRE Level 2, FIRE Level 3, etc. and take an aim at what you think is more suited for you.
And if you do an online search, you will find blogs for various levels – early retirement blogs, early retirement extreme blogs, frugal FIRE blog and what not.
So after having discussed Early Retirement and Financial Independence (both Lean and Fat FIREs), let’s tackle something related…
What is Financial Freedom?
I must warn again that there are no perfect definitions here. But I will try to say what I feel.
With Financial Independence (assuming something between LEAN and FAT), you are more or less locked into your chosen lifestyle. So if you chose LEAN FIRE and call it a day, then you really need to live frugally all your life because your corpus is smaller. On the other hand, if you chose FAT FIRE and took early retirement, then you can live a better lifestyle.
Now comes the difficult part to explain. 🙂
Financial Freedom I feel means that you live a much better life than what was possible in LEAN-Fire but also have the ‘real freedom’ to do few unplanned things (and spend on them) which you may not consider doing if you had a frugal lifestyle. In a way, it’s like having a FAT-Fire but with more flexibility.
Let me try with a mathematical example:
Suppose you are planning to achieve FIRE and have the following expenses:
Basic Expenses (Frugal Living) – Rs 40,000 per month
Discretionary Expenses (Better Living) – Rs 20,000 per month
Now if you are going for the LEAN-Fire, then you are mathematically allowed to spend Rs 40,000 a month. So that’s Rs 4.8 lac per year.
If you are going for FAT-Fire, then it allows you to live a life of Rs 60,000 per month kind of lifestyle (Rs 40K basic + Rs 20K discretionary expenses). That’s about Rs 7.2 lac per year.
Remember, having a FIRE corpus means that these kinds of expenses should be possible for you (with increasing inflation) for the rest of your life. And for early retirees, this means several decades!
Now comes Financial Freedom…
If I have the financial freedom, then mathematically, I should be comfortably able to spend annually:
Basic Expenses – Rs 40,000 x 12 months = Rs 4.8 lac, plus
Discretionary Expense – Rs 20,000 x 12 months = Rs 2.4 lac, plus
Another level of (optional) discretionary expenses = Rs 20,000 x 12 months = Rs 2.4 lac
Some unplanned luxuries (or unexpected expenses buffer) on an annual basis – Another lac or so
That’s real financial freedom! You can spend extra on few things here and there without having to spend sleepless nights thinking whether your corpus will run out before you run out of years or not. It also provides you with the buffer to spend in case of emergencies.
Achieving financial freedom also gives you the freedom from worry about money. And that’s the real freedom I guess.
So if I have to summarize, the timeline for corpus achievement goes like this:
LEAN F.I. —> FAT F.I. —> Financial Freedom
Early Retirement is up to the individual as to when he wishes to quit in between these levels. You can even look at these 3 levels as follows:
How much do I need to retire early?
How much do I need to retire early comfortably?
How much money do I need to retire early and never work again? 🙂
I know a lot of people feel that FIRE is just about cutting your expenses and saving more. But that is not rightly completely. I would say that its also about simplifying and redesigning your life, which obviously gives you more time to focus on other things.
Aiming for FIRE helps you test your relationship with money. And it’s like asking yourself as to ‘What would you do if you didn’t have to work for money ever again?’ It also helps you decouple the idea of happiness from owning material things. It’s amazing when you actually realize it.
And one more thing. Achieving early retirement (and not just financial independence) not just requires cutting back on expenses. It also requires you to have a decent income from which you can save a lot.
If you are serious about achieving financial independence, then you should begin early. There are various thumb rules for financial independence and early retirement (FIRE). One such rule is that depending on when you wish to retire, you should have about 20-30x your annual expenses in your FIRE corpus. But let me tell you that thumb rules are good to begin with. Once you start your journey and are making progress, you need to ask more serious questions like:
How much money (Corpus) do I require for financial independence and early retirement (FIRE)?
How long will my corpus last?
How much can I draw from the corpus each year?
Can I draw more than what I answered in the above question, atleast in some years?
What will the inflation be in my retirement years?
What are my expected returns?
What will be the impact on your corpus if markets enter a bear phase just at the start?
What if I need to spend some money on unplanned and unexpected emergencies?
Early retirement is an alluring goal or dream. No doubt about that. But to be brutally honest, very few aim for it. And even fewer can really achieve it. Most people are generally too late to begin with.
And apart from money, what does it take to retire early? …It takes a lot of focus and determination and a thick skin. And that’s because if you discuss these things with other people, you are sure to find many who will ridicule you. But if you are serious about it, then it means you will be going against the crowd and you will have to give a f*** to societal norms. If you don’t, then be ready for a regular retirement. That’s good and traditional too. 🙂 And there is ofcourse more to life than just money.
People feel that early retirement is a sort of hack to sort out their life! But I feel that retired life has too many other important aspects than just money. You really need to find out what you will do with all those years?? 🙂
If you are asking or searching for answers to questions like ‘How to plan for early retirement?’, then please beware of all the self-confessed best early retirement blogs, financial independence retire early blog, online resources, early retirement calculators, retirement corpus calculator India, financial independence number calculator, etc. Everyone has a different need and hence, the Financial Independence number and the Financial Freedom Plan will be different for everyone.
Time to end this article now.
In the debate of Financial Independence Vs. Regular Retirement, I would say that I prefer the FI. …But that’s my choice. If you feel that even the regular retirement is fine for you, then obviously that’s right for you and you should stick to regular retirement planning. You should never be forced to take a side because of the undue influence of others. Your life, your choice.
How to retire early at 40? How to retire early at 45? How to retire early at 50? What year can I retire? – Before you begin asking these questions, just stop and think for a moment as to is this really what you want? Or you are running away from something?
As for me, my aim is Financial Independence (and Financial Freedom). As for Early Retirement, I am too much in love with what I do (Investment Advisory and Goal-based Financial Planning) to currently think about retirement. 🙂 And that is the reason I focus on Financial Independence over Early Retirement.
But do not be disheartened if some of what I say seems too difficult to achieve. If you are willing to do what is necessary to achieve financial freedom, then let me tell you one thing – IT CAN BE DONE. I repeat. IT CAN BE DONE.