A lot of people dream about early retirement or rather financial independence. But can you retire early? Short answer is yes, most likely you can. However, you need to actively work towards this dream. Primary reason people are not able to retire early is that they spend before they save.
Following are the usual things I hear (in one way or the other): “Let’s use the bonus to take that vacation, we will start saving from next month for sure”, “There are these one time expenses that happen and we are not able to save”, “I don’t know where my money goes away each month”…..
All these are perfect examples of what happens when people spend before they save.
The saving equation
Simply put, for most of the people following equation is true :
Income – Expenses = Saving
If you are serious about retiring early, all you have to do is view the equation as, Income – Saving = Expenses.
See what I did there, I simply prioritized savings over expenditure by making sure that one saves first and then spends.
Lower expense is more important than higher saving
Retiring early is less about building a big enough corpus, and more about controlling your expenses. The lower your expenses, lower the corpus you require. This is the single biggest principle if you want to retire early. Even a higher rate of return and higher saving amount do not carry as much weightage as your expenditure.
As an example, if couple A earns Rs. 1,00,000 p.m, saves Rs. 70,000 p.m @10% return and spends Rs. 30,000 p.m, they would be able to retire in about 11-12 years. Couple B, on the other hand earns Rs. 3,00,000 p.m, saves Rs. 1,50,000 per month @ 10% return and spends Rs. 1,50,000 per month, would be able to retire after 17-20 years.
The reason: It’s pretty simple, since couple A has lower expenses, they need much less retirement corpus at the time of retirement (everything else e.g. inflation, return on investment being constant).
Mantra to reduce expenditure
Basic principle to adopt for spending is, spend on things that you need not those that you want. Yes, there might be those occasional spends on those wants but that’s what they should be, “occasional”.
I still don’t know how to reduce my expenditure
First and foremost thing is that, you have to be serious about gaining financial independence. You can save more by being frugal, but don’t be cheap.
Here is what I did, it may or may not work for you but it is a pretty good way to start.
Step 1: Track your expenses
I used excel to track my daily expenses (cash, non-cash) for 3-4 months, you may use free apps available but I found excel better as I could prepare my own format. I used to categorize the expenses in categories like daily travel, eating out, bills (mobile, Netflix, electricity etc.), shopping and random spends
Step 2: Mark avoidable expenses
At the end of every month, mark the ones that you think were avoidable. For me, when I started this exercise the 2 biggest categories where I could reduce the most were eating out and shopping. When I look back, it seems we were going berserk over shopping and eating out (usually both happened together on the same days).
Step 3: Start asking do I need this or I want this
It might be difficult or downright ridiculous to ask yourself this, especially if you are anything like I was. I loved to buy without even thinking, a typical materialist mindset. But you have to force yourself to do this and trust me once you do this for a couple of months it would come naturally.
Of course, if you are married, you should first and foremost take a buy-in from your partner about early retirement and things you would need to do to achieve it. If both the partners are not on the same page, following whatever I say is going to bring more harm than good.
But how much do I save?
Is $1M or Rs. 7 crore enough to retire early or would I need more? The answer to the question entirely lies on the kind of lifestyle you want, inflation, rate of interest and the projected age till you are likely to live. You can see my detailed post about how much do I need to retire early to get detailed financial excels to help you plan your retirement.
According to my working, if someone has current average yearly spend of Rs. 12 lakhs ($17142), and if they want to retire in the next 12 years, at an inflation of 7% pre retirement and 6% post retirement, with rate of interest on investment of 10% pre-retirement and 7% post retirement, they would need around Rs. 12-13 Cr ($1.7 – $1.85 M) to sustain their lifestyle for another 45 years post retirement.
This number might not be exact as I have taken some buffer amount for any emergencies especially medical ones (that amount depends solely on your risk taking appetite), but it should be in the ballpark for the kind of lifestyle, inflation and return rates I have assumed.
Thumb rule for saving
My first instinct was to put this right at top of the post, so that if my readers did not have much time they could follow this. But the missus said that it is better to explain the readers the what and why before giving them a thumb rule to remember and I could not agree more (for obvious reasons 😛 ).
If you save 65% of your salary, you could retire in 10-12 years.
Another rule of thumb that you would read in most retirement blogs is that the retirement corpus you need to retire today should be roughly 30 times your annual expenses today. Hence, if your annual expenses today are Rs. 12 lakhs per annum ($17,142), you need roughly Rs. 3.6 – 4 Cr ($514K – $570K) as the retirement corpus today.
If you think you would retire 15 years from now, that retirement corpus needed would grow to around Rs. 10-11 Cr ($1.4 M – $1.6M) if inflation is assumed @7% p.a. You may not have Rs. 4 Cr today, but good new is that if you keep on saving more, you could catch up with the required corpus and have Rs. 10 Cr in 15 years time. You may want to read my views on “why should you retire early”.