Does financial independence mean retiring early?

Date : 15/08/2019
Read: 5 mins

Here’s you can earn your way to retiring young

Vicki Robin, co-author of the bestseller Your Money or Your Life, has so ignited her admirers with her book and her blogs on sustainable living that they have formed an online community named FIRE, an acronym for ‘financially independent, retiring early’.

The group’s Reddit page describes the forum as “a place for people who are or want to become Financially Independent (FI), which means not having to work for money. This is closely related to the concept of Early Retirement/Retiring Early (RE).”

Defining ‘early’

Early retirement is an intriguing concept. For Robin’s fans at FIRE, it means quitting one’s job or career and pursuing other activities; at its core, they say, it is about maximising savings rate through less spending and/or higher income “to achieve FI and have the freedom to RE as fast as possible.”

However, the page does not spell out what “as fast as possible” is, or exactly what age could be considered early for retirement. Robin is an American, and FIRE members discuss issues in the US, where the retirement age is 67, compared to India’s 58 –one of the lowest in the world. If an American retires at 58, it would be a decade earlier; for you, it would be regulation time served.

So, if as an Indian you decide to retire ‘early’, what retirement age would you choose: would it be 50, or 47, or even lower – say, 45? According to a survey, Indians are more ready to embrace retirement than any other nation in the world. But that is if they retire at 58; can they be financially independent at 45? Can you?

Targeting 45

Let’s assume you are 26 years old now and you wish to retire early –say, when you are 45. This gives you 19 years to create your retirement corpus, which, as a rule of the thumb, should be about 25 times your current annual expenses.

So, if your expenses are Rs 3 lakh annually (Rs 25,000 a month), your retirement corpus by the time you are 58 should be Rs 75 lakh, which, as per your retirement target, you want it to be built by age 45. This is very ambitious, considering you are giving yourself 19 years to save what normally would have taken you 32.

Not that this cannot be done, but it needs discipline all around: disciplined saving, disciplined spending, and disciplined – as well as informed – investing. You have just under two decades to make your nest egg; let us examine how to go about it.

Getting the basics in place

First, you have to ensure that you have your basics in place; this is on two fronts:

On the finance part, see that you have got yourself a good health insurance, term insurance, and an emergency fund sufficient for six months of your expenses
Identify and budget for predictable events such as marriage, buying a car/house, kids’ education etc. This is essential because you have to save or invest for these, and you have to budget your living expenses after setting aside money for your goals.

Saving to invest

Since you have fewer working years, you should try and save as much as possible: remember, every rupee saved is a rupee that can be invested to make more rupees, which will not only finance your golden years, but also pay for the goals along the way (house, car etc).

Vicki Robin has two suggestions that can help: find cheaper substitutions, and seek your tribe.

About the first, she says “done right, the FIRE path is not about deprivation; it’s about finding cheaper ways to satisfy your needs.” Why holiday in Bali when Goa will do just as well? Of the second, she says befriending people who enjoy low-cost activities will help you lead a more moderate lifestyle.

Learning finance

Start learning about personal finance concepts, asset allocation, equity and debt market investing, SIPs etc. as you will need to make investments; this is the only way to make up for the 13 years of working life that you are forfeiting.

If you are new to investments, do remember the basic principle of investing: risk and returns go hand in hand; it is best if you consult an authorised financial advisor.

Last words

To sum up, the more you save, the more you can invest. As your job is your primary source of income, try and excel at it so you earn more to save more. When investing, don’t be afraid of volatile investments; invest aggressively without being reckless. The more you invest in high-risk/high-return investments, the faster you will be able to retire. Over the very long term you will not lose money, on the contrary, you will be rewarded with the highest returns.