Retirement is one of the most important financial goals of everyone. We plan a certain corpus as our retirement fund and the moment we achieve that corpus, we tend to call it a day.However, what we tend to ignore is the fact that there is simple mathematics behind retirement earlier than you would have thought.
The best way to ensure that you are on track to retire as per your time horizon is to invest money regularly, which helps you earn more money over a long-time horizon.As soon as your investments are enough to help you earn money to live on each year, you are good to retire. These investments could be mutual fund SIPs, stocks, bonds, real estate, gold, corporate FDs, IPOs, OFS, or any other type of investment vehicle.
Let’s break this down so you can know exactly when you will be able to retire. The most important concept for this is to know your savings rate, which is how much you earn after adjusting your expenses. If you spend 100% of your income, you’ll never be able to retire. This is largely because you’ll never be able to invest any money that will then earn money for you in the long run for your retirement.
On the other hand, if you spend 0% of your income, you can retire right now because somehow, you are living without needing to make anymore money.However, between 0 and 100% there are a number of savings rates that will correlate with the years that it will take for you to retire. For example, let’s assume your annual investment return is 5%, which is conservatively low. Let’s assume your withdrawal rate is 4%, which means you spend 4% of your net worth each year.
In this situation, if your savings rate is 10%, and your age is around 25 years, you will be able to safely retire at around 65-70 years, which is in the next 40-45 years. Safely would mean you will never run out of money. If your savings rate is 25%, and you are around the same age, you can retire in around 25-30 more years at around 55-60 years. If its 50%, at the same age as above, you can retire in around 15-20 years, which is around 45-50. If you can somehow save 75% of your income, at the same current age, you can retire in about close to 10-15 years, which is in your early 40s.
Now, getting to that high savings rate may not be easy in our world of societal pressure, keeping up with the hustle bustle of life. However, you can get closer by making smart decisions of avoiding debt and living simply. The key takeaway is that cutting your spending rate is way more powerful than just merely increasing your income. No matter how much your earning, decreasing your spending will speed up your process of early retirement.
So, if you are in the 35-45 years age bracket and want to retire in the next 10-15 years, you will need to save around 60-70% of your income. That said, many of us feel saving and investing income of 10% is in itself a great rate. That’s if you want to wait at least for another 40-50 years to retire.
Therefore, two of the easiest ways to retire early is to invest in mutual funds and equity coupled while cutting down your monthly spend. Mutual fund SIPs provide you with the benefit of compounding. Moreover, you can start investing smaller sums of money over a longer time horizon.
The numbers and examples used in this article are for reference only and are fictitious, providing you just with indicative figures.
Please find below, some of the best retirement funds we have shortlisted for you:
Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.