Excuse me for stating the obvious. Most people will not be financially independent when they retire. Here is why.
Forget about early retirement; Most people will not become financially independent at normal retirement (55-60). Unlike early retirement, this is a mandatory retirement. Otherwise, our quality of life will significantly decrease, and we will depend on our children. Also, why have we not seen a retirement crisis in India?
(1) For this, we need to invest an amount equal to at least 75% of expenses (that will continue in retirement) as early as possible. You can deduct expenses for your parents, children, and EMIs and travel for work. Even then, this 75% target for expenses is tough to achieve.
(2) income minus expenses should be a big enough number for this.
(3) For this, the income should be high enough
(4) This implies that expenses should not grow as fast as income. A mistake many make in the name of “I deserve” this and that.
(5) Debt should be kept to a minimum. If you “must” own your roof, there will be implications. Cash-rich is better than asset-rich cash-poor.
(6) We need luck and providence to escape huge expenditures or frequent unexpected recurring expenses due to health/hospitalization, etc. An emergency fund equal to six months of expenses has limited utility.
At least these many stars must align for an ordinary guy to become financially independent in retirement. I am sorry to say this will not happen for most people. It is not impossible, but it is pretty hard. Changing our social station always is.
So investing in that small cap fund will not save anyone unless the investment amount is large and grows larger consistently (in a risk-managed portfolio).
“This is so de-motivating. Is there no hope left for me?”
What I have stated is the ground reality. I am only saying that the cup will never be full of most people. That does not mean we stop trying to fill it.
We will have to try our best: increase income as much as possible, work our backs off, keep expenses at a minimum, etc. The more we sacrifice our wants, the better our chances.
Yes, we should not sacrifice all our dreams, but considering that financial independence at normal retirement is mandatory, some sacrifice is essential. Like everything else in life, a balance is essential here, too. We can find the balance only if we understand both sides of the coin – short-term gratification and long-term independence.
“Obstacles don’t have to stop you. If you run into a wall, don’t turn around and give up. Figure out how to climb it, go through it, or work around it.” – Michael Jordan
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