Early Retirement by 40 - Financial Independence, Retire Early (FIRE)

Early retirement is a situation in which a person stops working earlier than at the usual statutory retirement age. To retire early Individuals should ensure that they have enough money set up for their post-retirement expenses and monthly living expenses.
How to retire early by 40
3 min
02-July-2024

Before taking the decision to retire early individuals should ensure that they have enough money set up for their post-retirement expenses and monthly living expenses. F.I.R.E, which stands for "Financial Independence, Retire Early" is a financial rule for early retirement planning.

For many decades, retirement was always a milestone that occurred typically at the age of 60. However, this concept is now changing rapidly and an increasing number of people are considering early retirement. Many millennials are seriously planning to retire by 40 or 50. If this sounds like an appealing option to you, you’re in the right place. In this article, we explore the meaning of early retirement and discuss how you can create an actionable early retirement plan.

What is early retirement?

Early retirement is the decision to stop working or leave the active workforce before the traditional retirement age of 60 (or 65). People who choose to retire early should have enough financial security to support their lifestyle over their post-retirement years. The corpus accumulated must be enough to help the retiree live a comfortable life without needing any active employment.

Different experts recommend varying methods of developing an early retirement plan. Some strategies may work for some individuals better than others. Nevertheless, the FIRE method is a common benchmark strategy.

Is it possible to retire by 40 in India?

Retiring by 40 in India is challenging but not impossible. With careful planning and disciplined execution, you can retire by 40 with a corpus large enough to lead a comfortable life. Here is an overview of some of the strategies you can implement to get you closer to your goal.

  • Start investing early to make use of the power of compounding.
  • Maximise income by pursuing high-paying careers, building successful businesses, or creating passive income streams.
  • Embrace minimalism and save aggressively through strict budgeting and cutting unnecessary expenses.
  • Investing in a diversified portfolio of stocks, debt instruments, real estate, and other assets.
  • Manage debt effectively by avoiding or minimising the use of high-interest debt.
  • Keep lifestyle inflation in check by resisting the urge to increase spending as your income grows.

Also read: What are retirement mutual funds?

The FIRE model for early retirement

FIRE is an acronym for Financial Independence, Retire Early. It enables people to look beyond the conventional retirement concept and achieve their goal of early retirement in their 40s or 50s. The main principles of the FIRE early retirement plan include the following:

  • Extreme savings
    If you are following the FIRE method of early retirement, you need to save around 50% to 70% of your income. This means a substantial portion of your earnings must be saved rather than spent, so you can quickly accumulate a sizable corpus.
  • Frugality in spending
    Alongside your savings, you must also ensure that you do not overspend or spend on discretionary items. This method of early retirement plan emphasises frugality and minimalism in living. So, you must focus on cutting down whatever costs can be eliminated.
  • Regular investing
    The amount you save up should be smartly invested in a mix of different assets, so you can accumulate the corpus you need to retire by 40 or 50. Depending on your risk tolerance, you may choose market-linked investments ranging from index funds to international funds.
  • Prudent withdrawal
    Once you accumulate the required corpus and retire early, you need to be mindful about the amount you withdraw each month. The 4% rule can help you here, where you withdraw 4% of your corpus in the first year and adjust this amount for inflation annually.

How the FIRE model can help you retire early?

The Financial Independence, Retire Early (FIRE) model can get you closer to your goal of early retirement. Let us look at some of the ways in which it can help.

  • Setting clear goals
    Setting clear and well-defined goals is the first step to achieving financial independence. The FIRE model helps you do just that. By encouraging you to build a corpus that is about 30 to 35 times your annual expenses, the method gives you a clear objective that you can work towards.
  • Increasing the savings rate
    The FIRE model encourages you to save 50% to 70% of your annual income. This is significantly higher than what most traditional financial models and strategies advocate. Such aggressive levels of savings can accelerate wealth accumulation and significantly reduce the time to retirement.
  • Encouraging a frugal mindset
    To be able to save 50% to 70% of your annual income, you must adopt a frugal lifestyle. To do that, you need to spend consciously and only on the necessities. Living minimalistically and within your means can boost your wealth creation potential and get you closer to early retirement.
  • Focusing on investing wisely
    The FIRE model encourages investing in assets that can deliver passive income, which is crucial for early retirement. The goal of the method is to generate enough passive income to cover your living expenses. Achieving this objective is possible if you focus on investing in assets that can generate passive income, such as real estate, dividend stocks, and fixed deposits.

Also read: NPS vs mutual funds

Tips to plan for early retirement by 40

In addition to the FIRE method, the following tips and ideas can also be helpful in implementing your early retirement plan.

  • Start your plan early
    If you want to retire by 40, you need to start planning and saving up much earlier. Ideally, you need to save up right from when you get your first salary or paycheck. This will give you a headstart on the process and allow you to save up over a longer period. As a result, you can afford to take more risks and benefit from the power of compounding.
  • Assess your situation
    Understand your current financial situation. This will help you plan for early retirement realistically. For instance, if you have already accumulated a sizable corpus by the age of 30, you may be able to retire by 40. However, if you are yet to begin your investment journey in your 30s, you may need to adjust your retirement timelines accordingly.
  • Set clear goals
    To fulfil your dream of retiring early, you need to have a solid retirement plan in place. The first step to achieve this is to have clear goals. This means you need to know the age by which you wish to retire, how much money you need to have accumulated by that time and which post-retirement goals you need to account for.
  • Create a budget
    A budget is the cornerstone of implementing your early retirement plan effectively. Without a budget, you may not understand your current financial capacity. As a result, you may set aside less money than you can actually afford to, thereby delaying your retirement goals. Alternatively, trying to save more than you can afford may not be feasible.
  • Maximise your retirement contributions
    Whenever you have any additional income or savings left at the end of the month, prioritise redirecting these funds to your retirement account. This will help accelerate your early retirement plan and make it easier for you to achieve the goal of retiring by 40 or 50. The more you maximise your retirement contributions, the sooner you can retire.
  • Diversify your investments
    Using all your funds to invest in one or two investment options — no matter how potentially lucrative they may seem — is never a smart idea. If those investments perform poorly, you risk losing most or all of your capital. This will set your retirement planning back by several years and may make it difficult (or even impossible) to retire before you are 60.
  • Know your HLV
    Your HLV or Human Life Value is the present value of all your future expenses, income, liabilities and more. Knowing this number can give you more clarity about how much you need to save to comfortably retire by 40 or 50. You can use online HLV calculators to get a better idea of this figure.
  • Monitor and adjust your contributions as needed
    The contributions you make to your retirement fund need not be fixed from the day you start investing to the day you retire. You can adjust your contributions as needed to make early retirement possible. For instance, if you initially decided to retire at 50 but then change the decision and plan to retire by 40, you can increase your contributions accordingly and build the required corpus sooner.
  • Have a financial plan
    A financial plan is a non-negotiable requirement if you want to achieve the goal of early retirement. You need to clearly decide the age of retirement and the corpus required. Then, you must analyse your investment options to build a portfolio that supports your goal of retiring by 40 or 50, as the case may be. It’s also essential to adapt your financial plan to align with your evolving retirement goals.
  • Reduce debt
    If you are not careful about the debts and liabilities that you take on, they may quickly add up and cut into your overall earnings significantly. This will leave you with much less to save each month. So, avoid discretionary debt like credit card liabilities and unsecured loans as much as possible.
  • Maximise your income
    Another way to ensure that you save more is to maximise your income. You can increase your primary income through promotions, new job opportunities, side hustles and even through your own business. Also, look for additional sources of passive income to supplement your primary income, so you can save up more each month.
  • Invest 20% of your earnings
    In case you want to retire early but have no solid plan to rely on, you can start with the simple yet essential step of investing a fixed amount each month. The 50-30-20 rule can help you here. According to this rule, you need to save or invest 20% of your income, allocate 50% for your needs and use the remaining 30% for your wants. Investing 20% of your earnings in a disciplined manner will give your early retirement plan a head start.
  • Use your bonuses wisely
    If you are a salaried employee, you may receive bonus payments at work based on your performance. While it may be tempting to spend these bonuses on impulsive purchases, you need to invest these additional earnings in your retirement plan in a disciplined manner if you want to retire by 40.
  • Maximise tax savings
    Tax payments can take up a significant portion of your annual income. If you are not careful, you may not have sufficient funds to invest today to meet your early retirement goals tomorrow. This is why it is crucial to maximise your tax savings with investments that offer tax benefits or by leveraging any other exemptions or deductions you are eligible for.
  • Live below your means
    Earning more is not enough. You also need to ensure that you save a significant part of your income. To do this, you need to actively live below your means and cut down all unnecessary expenses. This will help you reduce your outlays and redirect more of your income towards your early retirement corpus.

Also read: What are institutional funds?

Retirement plans to help you retire early in your 40s

To retire by 40, choosing the right investment options is key. In India, there are a plethora of attractive tax-efficient retirement plans that offer moderate yet stable returns. In addition to investing in such retirement plans, you can also consider diversifying your portfolio with growth-oriented investments.

With a diverse portfolio of assets, you can not only increase your savings rate significantly but also put yourself in a good position to withstand market volatility and protect your capital from erosion. Here are some retirement plans and investment options you can consider investing in to get closer to early retirement.

National Pension System (NPS)

The National Pension System (NPS) is a government-backed retirement savings scheme. It is a voluntary contribution plan that provides you with a fixed pension once you attain 60 years of age.

One of the major advantages of investing in NPS is that you can claim the investment you make in the account as a deduction under section 80C of the Income Tax Act. The maximum amount you can claim is Rs. 1.5 lakh per financial year, which can reduce your tax liability.

Other benefits include the freedom to choose the funds you wish to invest in, a partial withdrawal facility, and low costs.

Mutual funds

Mutual funds are unique investment options where the money from multiple investors is pooled together and invested in a diversified portfolio of assets. Equity funds, debt funds, and hybrid funds are the three most popular categories of mutual funds, each with its own share of benefits and drawbacks.

Most mutual funds are actively managed by professional fund managers who are responsible for asset selection and ensuring that the funds deliver returns that beat the benchmark index.

That said, there are mutual funds that are passively managed as well. These funds only aim to replicate the performance of a particular market index instead of beating it. Passively managed funds are significantly more cost-effective with lower fees than actively managed mutual funds. Some of the advantages of mutual funds include diversification, better wealth creation in the long run, and the ability to invest fixed sums of money regularly via a Systematic Investment Plan (SIP).

Public Provident Fund (PPF)

The Public Provident Fund (PPF) is another government-backed retirement savings scheme you can invest in for early retirement. Similar to the NSC, you also get guaranteed returns and tax benefits with PPF.

You can claim PPF contributions of up to Rs. 1.5 lakh per financial year as a deduction under section 80C of the Income Tax Act. Additionally, the interest and the maturity amount are also tax-free.

The Public Provident Fund has a lock-in period of 15 years, with the ability to partially withdraw investments after the 7th year. This makes it a suitable investment option for meeting long-term goals like retirement.

Annuity plans

Annuity plans are another good investment option you can consider for early retirement. Typically offered by life insurance companies, annuity plans provide guaranteed payouts at a frequency of your choice. Investing in annuity plans is a good way to create a passive and stable income source.

There are two types of annuity plans you can choose from: immediate annuity and deferred annuity. In an immediate annuity plan, you invest a lump-sum amount, and the guaranteed payouts start immediately. In a deferred annuity plan, you can either invest a lump-sum amount or invest over a period of time. The guaranteed payouts, however, start at a later date.

Insurance

Although it is used primarily for protection from various risks, certain insurance products can contribute to early retirement. Term and life insurance products are designed to offer financial security to your dependents if you pass away.

Health insurance products, on the other hand, are designed to protect your finances from being depleted by the high costs of medical treatment. Unit Linked Insurance Plans (ULIPs) and endowment policies combine insurance with investment. These products pay a lump-sum amount if you survive until they mature.

It is important to keep in mind that insurance policies often have higher charges than pure investment products. Therefore, it is advisable to include them in your portfolio as more of a risk management measure than an investment.

Benefits of early retirement by your 40s

Retiring early, when you are in your 40s, can be beneficial on many fronts. Here are some of the advantages you get to enjoy by taking on an early retirement.

  • Better health and well-being
    Retiring early can reduce work-related stress and give you more time for physical activity, proper nutrition, and adequate rest. This can lead to better overall physical and mental health, including a potential increase in your lifespan.
  • Pursuit of personal interests
    Early retirement provides you with a break from traditional work. You can use the new-found time to pursue passions, hobbies, or maybe even alternate career paths without the pressure of finances. Or, you can use the career break for personal growth, learning new skills, or exploring entrepreneurial ventures.
  • More time with family
    Another major benefit of early retirement is the opportunity to spend quality time with loved ones. You can be more involved in your children's lives, care for ageing parents, or simply enjoy deeper connections with friends and family.
  • Freedom to travel
    With little to no work commitments, you have the freedom to travel extensively while you are still young and active. You can go on a trip around the world and enjoy rich cultural experiences before the potential health limitations of older age set in.
  • Financial flexibility
    If managed well, early retirement can provide financial flexibility. For example, you can choose when to draw from various accounts to optimise tax situations. Additionally, you might choose to work part-time or seasonally, giving yourself a healthy balance between income and leisure.

Also read: What is a life cycle fund?

Budgeting to retire at 40

If you plan to retire at 40, budgeting for it requires strict discipline and strong financial planning. Here is a step-by-step overview of how you can effectively create a budget for early retirement.

  • Step 1: Start by calculating your target retirement savings. It must ideally be at least 25 to 30 times your annual expenses.
  • Step 2: Create a detailed budget that aims to minimise expenses as much as possible. Remember to cut back on unnecessary expenses, retaining only those that you think are essential. Embracing frugality and minimalism, even if it means making lifestyle adjustments, is crucial for early retirement.
  • Step 3: Maximise your savings. You must aim to save at least 50% of your income regularly. Invest in a diversified portfolio of assets and try to automate investments as much as possible.
  • Step 4: Regularly review and optimise your budget, while constantly looking out for different ways to increase income and reduce costs.

Conclusion

To facilitate early retirement, you need to focus on the investment options that can help you achieve your goals within the timeline required. Mutual funds are one such option. By choosing funds that offer market-linked returns, you can potentially accelerate the process of wealth creation and retire early. You can also offset some of the risks associated with market-linked investments by choosing fixed-income mutual fund schemes.

On the Bajaj Finserv Mutual Fund Platform, you can compare mutual funds and choose from over 1,000 schemes to put your early retirement plan into action. You can also choose to start a SIP investment to benefit from rupee cost averaging.

Essential tools for mutual fund investors

Mutual Fund Calculator Lumpsum Calculator Mutual Funds SIP Calculator Step Up SIP Calculator
SBI SIP Calculator HDFC SIP Calculator Nippon India SIP Calculator ABSL SIP Calculator
Tata SIP Calculator BOI SIP Calculator Motilal Oswal Mutual Fund SIP Calculator Kotak Bank SIP Calculator

Frequently asked questions

Is it okay to retire at 40?
Early retirement at 40 may be a suitable decision for you based on your financial security and the corpus you have accumulated.
How much money do I need to retire at 40?
That depends on your post-retirement goals, annual expenses, the inflation rate and your current investment corpus.
How can I retire by the age 40?
You can retire by 40 if you have a solid financial plan that will help you accumulate the funds you need to live comfortably thereafter.
Is Rs. 2 crore enough to retire at 40?
That is subjective and depends on your financial needs. You can use any of the different thumb rules to find out if Rs. 20 crore is enough for you to retire by 40.
What is the 4% rule for early retirement?
The 4% rule for retirement is that it is a smart idea to withdraw 4% of your retirement corpus each year, after adjusting for inflation.
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Bajaj Finance Limited (“BFL”) is an NBFC offering loans, deposits and third-party wealth management products.

The information contained in this article is for general informational purposes only and does not constitute any financial advice. The content herein has been prepared by BFL on the basis of publicly available information, internal sources and other third-party sources believed to be reliable. However, BFL cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. 

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