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A 5-minute guide to early retirement

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A 5-minute guide to early retirement

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Most high-income earners with software/MBA degrees reach middle-management by age 40. In the new economy, these people have a high risk of being laid off for being expensive or see their incomes stagnate. But when you become financially independent by age 40 you can make bold life choices.

A 5-minute guide to early retirement
Why Early Retirement?
  • Most high-income earners with software/MBA degrees reach middle-management by age 40
  • In the new economy, these people have a high risk of being laid off for being expensive or see their incomes stagnate.
  • It is already happening in the IT industry.
  • Typically around this age is when you are saddled with multiple  expenses like home loan EMI, saving for child’s higher education, saving for retirement etc
  • It is very stressful to meet these rising expenses when your income is not increasing or you are laid off.
  • But when you become financially independent by age 40 you can make bold life choices like changing careers, starting a business, working less for a healthier work-life balance or simply taking a break for a few years.
  • If you start early, you can even become financially independent by your early 30s.
  • Biggest Misconception About Early Retirement
    • Most people attracted to F.I.R.E think they can “sit and eat” from their early retirement corpus from age 40 till they die without doing any extra work.
    • TRUTH -No one can enjoy doing absolutely nothing for 20-30-40 years
    • SOLUTION- So, the idea is to achieve the financial freedom to do work you never want to retire from.
    • What Does Early Retirement Mean To  Us
      • It means retiring early from the rat race of working only for money sacrificing your personal life goals.
      • Instead, you save “enough” early in life to give you the safety net & confidence to earn money in a way that makes you happy & fulfilled.
      • That “enough” is typically 25 years of expenses.
      • Early retirement is simply a re-ordering of priorities: if you want to retire early then save first for retirement ahead of other goals like buying a house or foreign vacations.
      • Save At Least 50% Of Your Income To Retire Early
        • If you save only 25% of your income you have to work 3 years to save 1 year of expenses
        • If you save 50% you only have to work one year to save 1 year of expenses.
        • Once investment returns & compounding kick in, you’ll be able to save 25 years of expenses within 10-15 years at a 50% savings rate
        • Spend Smart a.k.a Frugality
          • Frugality means getting value for money without being wasteful in purchases big and small
          • For example, People already save 50% in India but in a wasteful manner as home loan EMI.
          • On a 20-year home loan with 8% EMI, you pay almost the entire cost of the house as interest to the bank. That is a wasteful way to purchase a house.
          • You could have invested that interest money as SIP and become financially independent instead.
          • With rental yields at 3% and EMI at 8%, you can rent while saving up to buy a house. That will be less wasteful and less stressful.
          • One Advice I Want To Tell People Interested In F.I.R.E
            1. Learn the Rule of 72.
            2. You can use the Rule of 72 to calculate how your lump-sum corpus will compound over many years:
            3. Example: If you save up Rs.1 crore by age 40 and don’t touch it until you are age 65  it will grow to Rs.16 crores assuming 12% CAGR.
            4. The extra 15 crores are pure returns from compounding.
            5. You can verify it using this online calculator: Enter Rs.1 crore as an initial investment and 12% as expected return over 25 years. Check the final corpus valueMoral of The Story: The real power of compounding comes from saving up a LARGE corpus as soon as possible say within 10 years. This is the “magic math” behind early retirement.
            6. Once you understand this concept, you will automatically do all the steps necessary to achieve early retirement like:
              • Starting to save early in life
              • Spending frugally
              • Saving 50% of your income
              • Investing in assets that give above-inflation returns
              • Getting a high-income job
              • Convincing your spouse about early retirement etc.
              • Sugandha and Naren are a digital Nomad couple living in Goa, India striving to F.I.R.E by 45. This article was first published on SavingHabit.com and can be accessed here.
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