Financial Independence, Retire Early (FIRE) is a movement of people devoted to a program of extreme savings and investment that aims to allow them to retire much earlier than what traditional retirement plans would permit.
It is a financial movement defined by frugality, extreme savings and investment. By saving up to 70% of their annual income, FIRE proponents aim to retire early and live off small withdrawals from their accumulated funds. However, I find this very impractical and also unrealistic. Yes you may technically retire early, but you will also end up compromising on your lifestyle. It also ignores some key aspects such as how to budget for housing or what happens if you have children? Will you be able to provide them with an education in a top tier university? Also most articles on this subject are based on the American/ Western context and may not be relevant to India.
In this blog, I have applied all my learning’s over the last 10 years of managing money (my own as well as my clients) and have suggested a practical way to get started in right earnest to be financially free. Given the goal of retiring early, we will explore how you can retire in the next 15 years, without overdoing the “Frugality” part of FIRE. While reading this article, some of you may realize that you cannot realistically save the amount required to retire in the next 15 years, however, you will learn the key principles required to retire earlier than your expected retirement age.
Step 1: Calculate your lifestyle expenses currently.
In order to even dream of retirement, the least you need is to have an idea of what sort of money it will require to sustain your current lifestyle. In my experience, you need approximately Rs.1 Lakh a month to have a good lifestyle in virtually any city in India (except Mumbai). This amount usually covers your building maintenance and property tax, electricity, groceries, maids, local travel, eating out and many other expenses you are likely to incur as a couple. You can use this link https://ortiumfin.com/your-retirement-expenses/ to calculate the exact amount. However, this does not take into account things such as housing, education costs for children and other lifestyle expenses such as traveling. I will cover all 3 of these subjects in detail later on in the article.
Assuming that Rs.1 lakh a month is enough today, and if you wish to retire in 15 years time, adjusted for inflation (assumed at 5% p.a), you will need to budget for generating approximately Rs.2 Lakhs per month to sustain this lifestyle 15 years later.
Step 2: How much do I require to generate Rs.2 Lakhs per months?
Usually, in most western economies, one budgets a withdrawal rate of 4%. What this means is that for every Lakh you wish to withdraw per month (12 Lakhs per year), you need assets which are 25x that amount. Basically for Rs. 1 Lakh a month, you need assets of Rs.3 Crores, and for Rs. 2 Lakhs a month, you need assets of Rs. 6 Crores. However, here again, I don’t think such numbers are applicable to India. In my opinion, a 5% withdrawal rate is sufficient ( or 20x what you wish to withdraw). The reason I say this is that India is a growing economy and is likely to grow at a good pace for the next few decades. One can possible generate much better returns here as compared to the developed economies hence a slightly smaller corpus should be enough. This number gives us a target of having 2.4 Crores for every Lakh of income you wish to generate per month. For 2 Lakhs per month, we will need approximately 4.8 Crores (lets round it off to 5 Crores).
Step 3: How do you reach a target of 5 Crores in the next 15 years?
Well through savings and investing of course! If you need to reach such a steep target in the next 15 years, you need to generate a high return and take some risks. Let’s play with some numbers now. If you wish to reach your target of 5 Crores in the next 15 years, you need to start by saving Rs. 50,000 per month today, increase it by 10% every year, and earn a return of 15% p.a. on that amount. So simple! But how do you generate a return of 15% p.a? Well in terms of investment options, this practically leaves us with only one choice when it comes to investing, and that is Equities ( Directly or through Mutual Funds). Equities is perhaps the only asset class that has the potential to deliver such a high return over such a long period of time.
It is not going to be easy but you will have to understand and make investment choices that you are comfortable with. You will also need to figure out some investment jargon. For example. if you decide to invest through the mutual fund route, which fund or funds should you be investing in? Should you buy passive or active funds? Should you buy large cap, mid cap, flexicap or multi cap funds? The choices are endless and you could lose a few years in just figuring out what works and which sort of Mutual Funds can even get you there!
You will also not be able to avoid the risks and volatility associated with equity investing. Your emotions when you are sitting on significant losses or gains will make a difference too! Getting things wrong during market extremes will also delay your retirement by a few years, if not a decade or more!
You also have the choice of taking a conservative approach to your retirement goal, but that too has its own costs. You will have to save a much higher amount and that will compromise your current lifestyle.
Any choice that you make will have trade-offs. You need to make choices in sync with what you are comfortable with. The reality of investing is that there are no guarantees but that does not mean you should give up your dreams of retiring early.
You can decide to go on this journey all alone, or you can take the help of a financial expert which will make your journey much easier. In the second route, you will end up paying fees or a commission, but will ensure that you stay the course, especially in volatile times.
I have said enough on what it takes to generate a large investment corpus for retirement. But there are many other aspects that we have not discussed such as housing, kids and lifestyle expenses. I will cover these in the next section.
What about Housing?
When you retire, you need to have your own house. The most ideal scenario would be that you have a roof over your head provided by your parents or some ancestral property. However, for those of you not lucky enough to have that privilege, read on!
A good house in a tier 2 or 3 town will cost approximately 50-70 lakhs today. Even if I make an assumption that real estate will appreciate by 6-7% per annum, you will need to spend about Rs. 2 Crores to buy a house 15 years down the line. In order to achieve this, you will need to save an additional Rs. 20,000 per month in the exact same way you saved for your retirement above. If this is in any Metro city like Bangalore, Chennai, Delhi etc, that amount probably goes up to Rs.4 crores, and you will need to start saving Rs. 40,000 per month. If the same house is in Mumbai, then lets just pour some water on your dreams of FIRE. An alternative is to take an EMI and buy the house before you retire itself if your financial situation permits you and it doesn’t compromise your dream of retiring early. Otherwise staying on rent is a more financially sound approach.
Now, I do understand that housing is subjective, so these are just ballpark numbers. You can introspect and actually put hard numbers to the type of house you wish to own and the city/ locality you wish to own it in.
What about education expenses of your children?
The running costs for raising children, such as their expenses, school fees etc, should come out of your salary. In about 15 years time, the average reader of this article, whatever their age be, will have to mainly budget for their college education. Now college education in India is usually very manageable, however college education anywhere abroad is usually quite expensive.
A 4 year undergrad degree abroad usually costs approximately Rs.1.5 to 2 Crores today. Adjusted for inflation, this will cost around Rs. 3 to 4 Crores 15 years later. This is a very steep cost to incur and it is unlikely you can afford this goal if you wish to retire early. However, you can always plan to send them for their post graduation abroad, as it is usually a 1 or 2 year course, so your expenses automatically become 50-75% lesser. In order to budget for this, you will need to save Rs. 20,000 per child in the same way and in the same investment products as the ones mentioned above.
Lifestyle Expenses
Lifestyle expenses vary amongst individuals. Some love traveling, some love eating out a lot, and some prefer a simple lifestyle. Well the simplest way to take care of your expenses is to earn them! After 15 years, one should transition from working because you have to, to working on your own terms. Early retirement does not mean you sit at home and do nothing, but rather it means that you are working now only to stay occupied, have a purpose, do what you love, and at the same time earn just about enough to take care of your lifestyle expenses. You could freelance, you could go into consulting, you can do whatever you want, but you should earn just enough to meet any additional expenses you may have to satisfy your lifestyle.
My personal thoughts on this subject
Ideally both the spouses should be contributing financially. If your significant other is not contributing financially, it will be tough for you to achieve this goal of retiring early, unless you have a stellar career.
Focus on your career first. Only a good career will enable you to save enough to meet the above goals in a time bound manner. The rate of return is secondary. How much you save will have the biggest impact if you wish to retire early.
Be smart about your spending. You do not need to be frugal, but you can definitely be smart about it. What I mean by this is that avoid excesses. For example, instead of having a Rs. 300 coffee at starbucks, order the best blend you can find and make the coffee at home. It will still cost you only half or lesser of what you pay at starbucks, and yet you will have an amazing coffee! This is just an example, but you can see which areas in life you can cut down your excesses as it will enable you to save more.
Keep working! As I mentioned earlier, retirement does not mean doing no work at all. The modern definition of retirement is to work and be productive but completely on your own terms. You may work just 3-6 months in a year, or you may work on something full time that excites you, but keep working and earn some basic income even after you “retire”.
Act Now!
Retirement is a given. And there is no doubt that you will need a substantial investment corpus to retire. In my practical experience, the key to Financial Independence & Retire early is to start early. Every day that you delay will make it more difficult to achieve this goal. All you need to do is to start contributing some amount on a regular basis towards your goal of retiring early. It is then only a matter of time and you will eventually get there!
If you have liked this blog, do share it with your friends. If you have any questions or are facing any challenge in getting started, reach out to me on sparsh.kaeley@ortiumfin.com or whatsapp me at +91 9769677415.
Disclaimer: In the article, all examples are for illustrative purposes only. It should not be construed as an investment advice of any kind and/or recommendation to buy or sell the fund. Mutual funds are subject to market risks, please read all scheme related documents carefully.
