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What is Early Retirement...

In his article, we are going to talk about a popular topic called early retirement. A lot of people are talking about it these days, especially youngsters.as a matter of fact, there is a movement going on in the US which is called as fire movement. But what is this fire all about? It actually started in the US  and now it has come to India. also a lot of youngsters are getting curious about it. It actually means financial Independence retire early. And the meaning is that, you can retire by the time you are 35 or 40 years of age and you earn enough money during that time so that you can live off that amount for the rest of your life.

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Now the first question that would come to anyone's mind is that, if this is even possible? if we look around ourselves, we can see a lot of people who have achieved their financial goal at an early stage of their life. People might think that they must be extremely intelligent people or they would have probably done startup what they would have sold and earned millions of dollars. But the question is that, can a normal salary person do it? The good news is that, most of the people have achieved early retirement in a job, they were not doing any startup. But on the other side the bad news is that most people who were probably earning the same salary are not able to achieve it.

So what is the difference between these two kinds of people? There is only one difference, which is discipline. a person of average intelligence but above average discipline can actually make it. So what kind of discipline are we talking about? well will get into it as we move forward. Let's keep good things for the last before we get on to what and how of early retirement.

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Early retirement

Well to understand this better first we need to define retirement and understand what is this early retirement and financial Independence. so let us talk about retirement. as we understood it traditionally we saw our fathers and grandfather retiring from government jobs in public sector units at the age of 60 and by the time they would accumulate enough money that would last them for the rest of their lives. of course we can argue that there was Government support in terms of pension but today we see that a government jobs also do not have the pension support. Even in private jobs earlier than today the average retirement age is 60 years only and everybody is working towards that retirement goal that they would accumulate some amount of money that would last them for the rest of their lives. But the question is what kind of “rest of the life” that we're talking about? if we take life expectancy to be, on the higher side, let’s say 90 years, when we are talking about the 30-year period year so we should accumulate some amount traditionally that would last 50 years, this amount is called retirement Corpus. but if we have to retire early when we are talking about retiring at the age of 34-35-40 which means, we should accumulate that kind of money that should last for 50 or 60 years that is what early retirement means. if you have to build such a big amount that should last 50 or 60 years what we can do is we can make it slightly more conservative. we can follow a 3% rule which will make our life simpler. so 3% rule means that we should have such Corpus that if we withdraw 3% from it every year, it should last forever, here we are not talking about a 30-year period.so which basically means that we will make enough returns on that money that we can live of the returns and the principal will remain with us forever. so here also the assumptions are made similar to 4% rule which means that we are going to invest in such investments which are below TWO critical points: 

1. Beat the Inflation

2. Live a simple life. we will not increase the lifestyle we will not by a bigger car or a bigger house. But we can definitely follow the 3% rule. all we have to do is to calculate our minimum Lifestyle that we all would like to have and calculate our  annual expenses properly which basically means that you include all kinds of expenses like your rent, your groceries, your transportation, your utility bill and insurance premiums, for health insurance and medical emergencies. 

Now the big question comes, what should we do to achieve financial freedom early retirement?

I would like to question you because these steps are going to look very easy on paper, calculations are going below very simple very easy,but these are going to be very hard to implement and by heart because it would require you to lead a disciplined financial life for the rest of your life. If we see the positive side I can tell you, it will be much better than most of your peers, especially financially and you will be able to achieve a lot of financial goals at a much earlier age.

Now we can talk about the steps and perform the steps. Actually we must understand two basic mathematical concepts.

                           Income - expensive = savings

You have to save a lot and we must understand that. and how do we save a lot, we can decrease our expenses or we can increase our income. we are going to talk about that much detail slightly later.

    The concept of power of compounding

The concept of power of compounding is a very strong theory. If we can, whatever amount that is, can save and multiply it over a long period of time at a good return, then we can accumulate a good amount of money. so basically this power of compounding depends on three things:

1. The principal amount:- every month we must save more 

2. Rate of return:- which means that we should earn such a rate of return which would beat the inflation portion.

3. Time:- we must start investing as soon as possible, whenever we are ready, whenever we have some surplus money, whenever we have some savings. because the power of compounding works very very well over a long period of time and we must understand this.

Now that we understand the basics, we can get onto the steps of early retirement. 

Step no.-1:-

If you have a habit of doing things on credit, you must change this habit. This is the first step of financial discipline. If you have any kind of loan like student loan, car loan, credit card use, you must pay them off as early as possible. Even if you are a student you must pay all your dues for borrowing at the earliest.

Get out of Debt

Step no.-2:-

Lower your expenses. As per the equation, income - expenses = savings. if we have to increase our savings one way of doing that is by lowering our expenses and how do we do that we have already talked about the concept of reality which basically means that we don't have to be a miser only have to spend part we only have to buy those things that we are going to use or we are going to need again for example if you are not going to eat out much you are not only going to save on it of the expenses you also going to save on your medical bills. If you travel using a cycle to your office you are again going to be healthy living on the medical bills as well as the transportation costs. In fact, these days if you can work from home you are again going to save a lot.  how much savings we should be making from our income? so if we have to, for example say for one year course near to save about 50% from current annual income so if you're talking about saving for more than 50% of our life we have to save almost 75% to 80% of  income is not going to happen only by lowering your expenses that is where our next step 

Lower your expense

Step no.-3:-

increase your income:-And how can we increase our income? There are of course multiple ways. Of course you have to do some hard work if you want a better life in the later stage of our life. Let me give you some examples of working in a job. you can increase your skill, which is more valuable to you. For example if somebody is a graphic designer can he learn UI design or motion graphics 3D design. then one can you build a second source of income. probably you can target rental income, you can take freelancing projects. There are many websites these days on which you can apply and you can take up work parallely you can work on your weekend. You can even build an investment in the moon so you can probably work on a Startup as we talked about earlier. A lot of people make millions of dollars from a startup to have a small business. you can think about various growth prospects. you can think about launching in new Geography, you can think about new products. so basically there are many ways by which you can increase your income and lower expenses. of course every month we can save more.

Increase your Income

Step no.-4:-

Now the next step is the fourth step. we have to multiply the savings and how do we do that? again the power of compounding. We have to invest right and what we mean by right is that we have to invest in those kinds of instruments where we can take out money easily and where we can make and operators that are going to beat inflation. These kinds of instruments are basically your top Mutual Funds which you can take out any time because you would want liquidity. also with your investments is to buy a small house. I know a lot of people disagree with me on this, especially financial planners Because lot of people don't recommend buying a house at early stages of your life but believe me, not having a house can give you a lot of space ultimately why are we achieving early retirement? That is to bring happiness in our life especially if not in the initial 15 years we want a higher standard of happiness in the latter part of life. rent is generally a very big expense especially when you are going to calculate your annual expenses, rent is going to wake up. We can be smart here and can always buy a smaller house. It's up you. You don't have to buy a penthouse in the most expensive location. You can buy a 1 BHK or 2 BHK in the outskirts of a city or town not only give you security and peace of mind but also lower your expenses. In fact I would say that you will have to postpone your early retirement 45 years and you should definitely try to learn how to do it. You can do what you want to. For example if you always wanted to write a book you can take that up, if you like cooking, you can take that up, if you like trekking of course you can go for that also don't get signed by a number that I have to achieve financial freedom only in 10 years and I will fail. If you cannot achieve that of course like many other things not everything will go hundred percent as planned, if not in 10 years you can probably achieve financial freedom in 12 years or 13 years or even 15 years but a plan is always better than no plan. if you are going to plan your income and expenses, you are going to save more and multiply it properly and you are going to be financially disciplined. I can assure you that you will be better than most of your peers especially financially. I wish you all a healthy financial life.