Choosing to Retire Early

Dinesh Chaturvedi, my neighbour and I are very good friends. Though he is junior to me, at 27, he is more matured than most people of his age.  He worked for Sodexo and simultaneously was pursuing an Executive MBA from IIM Noida Campus. During one of our morning walks, he confided that post his MBA he wants to take up an assignment in Dubai, solely with an aim to earn more. On enquiring why the needed to do so, he explained that he aimed to retire by 40! I was surprised by his focus at planning life so meticulously.

Since I was intrigued, I enquired about his plans to create the required corpus. At this he smiled and said that as a financial planner it’s my responsibility to help him plan to achieve this aim.

After our conversation, I thought about the burnout the young workforce is facing these days. Increasingly, informed working individuals are thinking of early retirement. When mid-level IT employees in their 40s are being forced into early retirement through layoffs, it has become a necessity for the young generation to pro-actively plan for an early retirement.

Previously, people thought about early retirement in their fifties, but now it’s changing fast. But the one fact which is constant is that early retirement is not a piece of cake. In fact, it’s a scarce commodity and most can only dream about it as it requires all the financial skills that one can muster to make this dream a reality.

So, as a means to help my friend Dinesh, I listed some pointers to help him achieve this goal.

Do make early retirement an alternative to job

Having a steady source of income, via a job, is easy, as correlation between efforts in a job v/s paycheck earned is very less. During the working years, people wait for a year to get feedback.  As a result, corrective actions are delayed. In order to realize the dream of ‘early retirement’, such delayed actions are not welcome.

So, why are individuals not proactive in seeking feedback and making the necessary changes? The reason is lack of determination.

People dream of early retirement, but their actions are ofen not in alignment to this goal. In order to achieve such a goal, everything needs to be done ‘today’ rather than delaying it for tomorrow. Such actions will be possible only if one considers early retirement as a goal and not as an alternative, as it is a non-negotiable target.

Ensure plan is foolproof

There are two major threats that can jeopardize the goal. First being the habit of needless spending and the other is the lack of alternative source of income. These two are major bottlenecks and can limit the realization of one’s goal.

Steps to retire early

Dreaming about retiring early alone won’t help. One should passionately follow and take steps required to make this a reality. So, the first step is to draw-up a roadmap. Remember planning for early retirement is closely linked with one’s ability to lead a financially independent life. If one can become financially independent, the dream of early retirement automatically becomes a reality.

Create a road map

Dinesh has given me a target to generate a corpus of Rs5crs, by the time he is 40. This amount I assume is based on the thought to meeting his monthly expenses and using some of the cash to fund his start-up idea.

Simple math shows that every year Dinesh must build a savings of Rs38.46 lakhs. Continue this for 13 years, the target is achieved. But when we further break down this figure, it shows that on a monthly basis, Dinesh should save around Rs3.20 lakh, which imight be difficult.

So what’s the alternative? The trick lies in harnessing the power of compounding.

From his Side: Dinesh is willing to save Rs1,00,000 per month and will also be able to invest Rs10 lakhs every year as lumpsum. With these numbers I started preparing the roadmap which will be as follows:

Selecting the type of Mutual Funds

I suggested Dinesh to invest Rs1 lakh per month in mix of multi cap and mid cap funds. And in case of lump sum the ideal investment option would be a combination of large cap and balanced funds. In such a manner, the projected corpus is Rs7.50cr, which is higher than his expected sum.  Looking at these figures Dinesh is very excited and believes that his aim is within reach and more importantly is a possible one. More importantly, the advice along with a solid roadmap has managed to give wings to his dream.

The important aspect in undertaking such an exercise is to be aware of the numbers. With the help of specific numbers, the aim quantifies rather than being arbitrary in nature. Also, an individual gets the opportunity to understand the realities of the financial aim he/she has targeted. This realization is bound to further help the individual to achieve financial independence, thereby aiding the objective of an early retirement.