In the words of Morgan Housel, “Money’s greatest intrinsic value—and this can’t be overstated—is its ability to give you control over your time.” Whenever we think of having financial independence to gain complete control over our own time, it is invariably associated with retirement.
But it doesn’t have to be. Both financial independence and early retirement can be quite flexible concepts when viewed from a different perspective. Instead of thinking about retiring at 40 as never having to work again, a more flexible way could be to ask – How many years of independence can I fund for my 40-year-old self and to what degree?
What do you want to do with your financial independence?
Giving this an honest thought is possibly the most important step to your financial independence. Do you see yourself building your own company? Do you want to take a year or two and travel the world and start your career again? Or do you want to move back to your hometown, lower your cost of living and take up freelance work? It could be anything else, but the point is that it can help you better define a realistic goal and therefore account for the degree of expenses to plan for.
Analyse your spending
Differentiate needs, wants and wishes and identify which of your spends you’d want to retain during a time where you expect lower and less stable income at 40. A good place to start is by tracking your current monthly expenditure. This can be automated if you use a money management app that can track and categorise your expenses across all your bank accounts using the account aggregator framework. You may also want to consider additional life stage related expenses such as new dependents, healthcare expenses and major lifestyle changes you might make as you approach your targeted age.
Work out the maths!
There’s no all-encompassing number that everyone should aim for, it depends on your choices and expectations. If you make use of financial planning calculators online, it won’t be too hard to figure out the corpus you’ll need to achieve financial independence. A better way to understand this is to see how various choices can affect a 23-year-old who’s just starting out on their career.
Karan and Alisha, both got placed with the same company with a monthly take home of ₹1 lakh per month, their core expenses stand at ₹40,000 per month. Now, both of them want to be financially independent by 40 but for entirely different reasons.
Alisha wants to build a substantial corpus so she can try her hand at starting her own business. If this doesn’t work out, she can always return to a salaried job but wants to be prepared to weather the ups and downs. She needs to build a reserve for 5-7 years but does not want to tap into her retirement savings in her PF and NPS accounts. Here, we assume that due to changes in life stage, she is likely to incur double her current expenses. This is over and above inflation, which has been baked into these calculations at 6% per annum.
Despite all these factors, hers is a relatively easy goal to achieve. By investing about ₹25,000 every month with an annual 6% increment, she can easily fund a corpus of ₹2.3 crore at 40.
Karan, on the other hand, wants to move back to his home town and spend time with his family – a sort of partial retirement. His savings will be the primary source of income post-40, which he will use to support his family’s lifestyle for at least 30 years. Since Karan has a minimalist lifestyle, we assume that his core expenses will only increase by 1.5 times due to life stage over and above inflation. He will need to invest about ₹40,000 every month and step-up this amount by 12% every year to build a corpus of ₹6 crore.
Is it even possible to fully retire at 40?
It’s tough! In the previous case if Karan wanted to live the rest of his life (assuming till 80) with no other income but his savings, he’d need to invest about ₹60,000 per month and step it up by 15% every year. That leaves no margin for error and may not be realistically achievable.
Moreover, average life expectancy in India has increased from 61 years in 2000 to 69 years in 2022. Accessibility to better healthcare will push this further and bring it closer to the developed countries average of 78-80 years. If one intends to retire completely relying on their savings, planning for 40 years of freedom is impractically for most people.
As these variables can change dramatically over decades and completely derail your assumptions, a good way to approach an early retirement is to take a flexible approach. Simply fund your financial independence for as many years as you can in case you hit a roadblock. It won’t hurt if you delay your early retirement plan by a couple more years.
(Author, Praneet Battina, is part of Investment Team, Fi Money)
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