When can I achieve financial independence if my savings rate is 80%?

Published: November 4, 2022 at 6:00 am

Last Updated on November 5, 2022

A reader asks, “I am 30 years of age. We are a family of 5 ( blessed with a kid two months back). I am the only earning member. My house is in Ahmedabad (native), and I  work in Bangalore. My monthly expenses are about 50k currently. Expenses for the kid might increase after a few years due to education”.

“I manage to invest more than Rs. 2 lakhs a month. Rs. 50,000 in PF + NPS. Rs. one Lakh in equity mutual funds and Rs. 50,000 in fixed deposits. My current corpus is invested as follows: 14 L in PF, 7 L in NPS, 14 L in MF, 16 L in FD and 3.5 L in PPF. Please tell me if I am on track for FIRE (financial independence and early retirement). By when can I achieve FIRE?”

Your savings rate is impressive! The savings rate is the amount invested each month divided by the monthly gross income expressed as a percentage. In your case, it is 80% even with net income (2 L divided by 2.5L). So you are certainly on track to achieve financial independence. Also, expenses for your kid will not increase after a few years. It will increase much sooner than that! So it is crucial to review the plan each year.

Early retirement is a different ball game, though. We recommend vigorously starting planning for a second career less demanding than your current employer. A lack of work-life balance is often the reason for chasing after FIRE. See: Are we seeking work-life balance in the name of early retirement?


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Financial independence gives you options. You can afford to choose gainful employment that is closer to your heart and more fulfilling. However, this requires careful planning and preparation. See: How to build a second income source that will last a lifetime.

We will now use the freefincal robo advisory tool to determine when the reader can achieve financial independence. Once the essential inputs are keyed in, the retirement age is lowered until the investment amount required is close to the Rs. two lakhs a month mentioned by the reader.

Assumptions:

  • Inflation before retirement (%) 7
  • The assumed life expectancy of the younger spouse is 90
  • Inflation during retirement (%) 6
  • Years to retirement 10
  • Monthly expenses in the first year of retirement Rs. 98,358
  • Years in retirement (until younger spouse reaches age 90) 52 (we have assumed the reader’s wife is aged 28)

If we set the retirement age as “40” (this does not mean literal retirement. It just refers to the minimum of becoming financially independent.)

The outputs are:

  • Total corpus required: Rs. 4.32 Crores This does not assume any income flooring or annuity laddering. See: Use this annuity ladder calculator to plan for retirement with multiple pension streams
  • After accounting for existing investments (and their future growth), the net corpus is Rs. 3.27 Crores.
  • The monthly investment required (including mandatory PF/NPS deductions) is about Rs. 1.75 lakhs which is well below what the reader can invest now, even if we assume that expenses will increase due to the kid in the coming months.

The only catch is the low equity exposure currently. We recommend quickly increasing this exposure to 50-60% by deploying future and existing investments (by liquidating some FD) into equity. For actual retirement at 40, the equity exposure will have to be reduced to about 40% in the last 5-6 years. However, this is not necessary if a secondary source of income is available.

If the reader is uncomfortable with a sudden increase in equity exposure, he can gradually increase it, but it would also delay financial independence. If he can increase equity exposure to 50-60% within the next two years, then there is a good chance of achieving financial independence in about a decade. That is by his early 40s.

However, we would like to emphasise again (1) review the above calculation each year after taking into account current expenses and changes in circumstances and (2) never quit your current job unless you have tripled checked your financial independence status (with SEBI registered fee-only advisors if necessary) and ensuring you have a robust source of secondary income.

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Pattabiraman editor freefincalDr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over nine years of experience publishing news analysis, research and financial product development. Connect with him via Twitter or Linkedin or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation for promoting unbiased, commission-free investment advice.
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