After I wrote the post on how much do I need to retire early in India, a lot of FIRE enthusiasts reached out to me. The question they asked was, “Why did you choose a 40x factor vs 25x, which is the benchmark in FIRE community to retire early?”. I would explain my rationale below. Please keep in mind that I am talking from the perspective of a person living in India.
Why 25x of expenses?
Before I explain why I chose 40x vs 25x of expenses, it is important to understand the 25x rule. Behind the 25x rule is another rule – “the 4% safe withdrawal rate rule”. According to this 4% rule, post retirement or achieving FI one can withdraw 4% of his/her investment in the first year of retirement. Post that, one can keep increasing the withdrawal amount by the rate of inflation. Theoretically, one can last the rest of his/her life with these funds if the above percentages are followed. Trinity Study covers the 4% rule in detail.
Why 40x of expenses then?
The Trinity study was done using data from the US market. Hence, one should not directly apply it in Indian context. Additionally, there is the part about volatility that I describe below.
1. Inflation in India vs the US
While US has inflation ranging ~2%, in India inflation has been between 6-8%. While it is true that US saving rates are also lower, but the equity market returns are comparable to India. Hence, it becomes extremely difficult to get post-tax inflation beating returns without taking extra risk in India.
2. Interests are volatile
Even if you invest in equity market, you cannot expect that you would get inflation beating returns every year. There would be years when you get much higher returns and there will be years when returns are lower than inflation. If the period of low return is later in the retirement, it would still be fine. But god forbid, if you witness a 2-3 year period of low returns very early in your retirement, your plan will go for a toss.
3. Not so strong government welfare schemes
While the healthcare costs in India are lower and you should buy a health insurance, the government welfare support is not as great as it is in western countries. What this means is that quality education for your kids is expensive. Additionally, healthcare costs are on the rise and 10 years from now they might become substantial.
Hence, I have taken the current average cost of care and treatment for terminal illness – covered by insurance. Additionally, I have increased the same with an inflation factor of 7% for next 10 years (that’s when I plan to retire). Plus, I have put some extra buffer for kid’s education and accounting for interest volatility. This is how I reached a factor of 40x instead of 25x to retire early in India.