How much is enough for early retirement?

With more and more people across the world deciding they’ve had enough, it’s time for us to figure how much is actually enough for early retirement!

One of the biggest phycological impacts of Covid 19 has been that droves of people across the world are re-assessing what they want to do in their careers. Data maintained by the US Department of Labour shows that a staggering 34 million American workers have quit their jobs in the year till Nov 2021 with the trend expected to continue*.

While many are quitting to exit high demand stress sectors or jumping ship to more lucrative offers, several others are seeing value in the flexibility provided by work from home or hybrid models, and therefore exploring alternate career paths that provide this flexibility and better lifestyle.

Are you one of the many who is confronted with this question? Are you exploring an alternate way of work and life? If yes, then it’s likely that there’s one question that’s uppermost on your mind.

Do I have enough money to do this? Do I have enough stashed away to retire early or take up a lower income career?

The above trend is called the FIRE (Financial Independence, Retire Early) movement, a lifestyle movement with the goal of gaining financial independence and retiring early. What became particularly popular among millennials in the 2010s is now gaining more and more traction as an un-intended outcome of the pandemic.

So how much is really enough?

There are many thumb rules that go around, the most common being the rule of 4% i.e., you should have enough money such that you only need to withdraw 4% from your savings to meet your annual expenses on an ongoing basis. Alternately you should have 25 times your annual expenses in the form of savings.

While the above is a good starting point, it’s hardly the most accurate way. The reality is that the amount you may need is a function of several factors specific to you

1. How much you’ve saved so far
2. Your lifestyle expenses today
3. Your lifestyle expenses in the future
4. How you invest your savings
5. And finally, how early you plan to retire

We have used some illustrations to help you understand the impact of these variables on the amount you need stashed away to take the early retirement plunge. We have tried to use scenarios for different age groups to help you get an approximate sense of what you might need for your specific case.

To simplify this for our readers, we’ve made some standard assumptions as below

Monthly household expenses = Rs 100,000
Return on investment = 12%
Inflation = 6%
Life Expectancy = 85 years

Scenario 1: You are age 30 and want to retire by 40

Amount you will need at retirement = Rs 3.51 crores (29 times your annual expenses)

If you have accumulated Rs 20 lakhs, you will need to save an additional Rs 1.24 lakhs per month till age 40
If you have accumulated Rs 50 lakhs, you will need to save an additional Rs 84,000 per month till age 40
If you have accumulated Rs 100 lakhs, you will need to save an additional Rs 18,000 per month till age 40

Scenario 2: You are age 40 and want to retire by 50

Amount you will need at retirement = Rs 3.29 crores (27 times your annual expenses)

If you have accumulated Rs 20 lakhs, you will need to save an additional Rs 1.15 lakhs per month till age 50
If you have accumulated Rs 50 lakhs, you will need to save an additional Rs 75,000 per month till age 50
If you have accumulated Rs 100 lakhs, you will need to save an additional Rs 8,000 per month till age 50

Scenario 3: You are age 50 and want to retire by 55

Amount you will need at retirement = Rs 2.33 crores (19 times your annual expenses)

If you have accumulated Rs 50 lakhs, you will need to save an additional Rs 1.75 lakhs per month till age 55
If you have accumulated Rs 100 lakhs, you will need to save an additional Rs 68,000 per month till age 55
If you have accumulated Rs 132 lakhs or more, you are ready early 🙂

Depending on which scenario is the closest to your individual case, the above should help give you a sense of how close or far you are from your early retirement goal. Needless to say, with every change to any of the variables above, the target retirement amount will change.

So if the FIRE bug has indeed caught your fancy, we suggest you get an accurate sense of your target retirement amount and build a clear plan on how to get there. Without advance planning, it’s unlikely that many can retire early. But conversely, with sound and early planning, it’s a very attainable reality. Good luck!

Rohin Pagdiwala
Founder – Pagdiwala Investments
AMFI Registered Financial Distributor, Mumbai
9820191834

How to invest for retirement?
*(ref: EXPLAINED: The Great Resignation Is On.)