Who wants to slog through life if they can retire early and lead a comfortable life? Is that possible at all? Yes, indeed! Here’s how:
Everyone must plan for their retirement the day they find their first job or as early as possible in life. The sooner you begin, the sooner you can retire.
People who are slow starters must start working on their retirement plan at least by the time they are halfway through their career. Those who take this lightly, live to regret their negligence when they retire. If you start planning early, you may be able to retire much before your retirement age and yet lead a comfortable life in peace. You do not plan your retirement at all you may end up leading a miserable life thereafter—particularly if you do not have a pensionable job.
For a safe and comfortable retired life, you need to work out the minimum monthly income you need to sustain yourself. This potion is called the ‘Safe Withdrawal Rate.’ It is worked out on the basis of the 4% rule for retirement. It is pure mathematics. This roadmap is based on your annual expenses.
So, what is the 4% rule for retirement? And, how do you calculate that? For that you must find your FIRE number. ‘FIRE’ stands for ‘Financial Independence—Retire Early.’
The FIRE number is calculated by multiplying your annual expenses by 25 (Annual Expenses X 25 = Investment required for early retirement).
If your annual expenses come to $36,000, you will need to raise $900,000 before you decide to retire ($36,000 X 25 = $900,000).
The 4% rule is based on the theory that you can withdraw 4% of your retirement portfolio without running out of cash to meet your expenses. That means you have to save and invest in such a way that you achieve a retirement portfolio of $900,000 to lead a comfortable life. In other words, the sooner you raise this amount the better for you because you can safely retire after achieving this goal.
If you take a close look at it, you will realise that an investment portfolio of $900,000 gets you the sustainable return of $36,000 per annum. In other words, $900,000 X 4% = $36,000 (annual requirement). So long as you earn 4% return on your investment portfolio, your portfolio will continue to grow in spite of your withdrawals. However, adjustments for inflation may be needed to made from time to time.
If you save vigorously and aggressively during the early years of your employment, you would be able to achieve financial independence sooner and retire at a prime age without encumbrances. If you manage to save upwards of 50% of your income in the early years, you may be able to retire in your thirties or forties! Now, isn’t that wonderful?
Wishing you happy saving and a happy and prosperous retired life.
