How Much MONEY do you really Need for early retirement? And Time required to get it.
By Akash Kajre
Hello Folks, Have you ever wondered about how much amount of money you really need for your entire life including all your realistic goals & dreams. In this article, I will help you to figure out this amount by taking the example of a person( let’s say Sandeep) who is earning 20,000 per month. He is in his young 20’s and currently a bachelor.
Assuming, Every month Sandeep Spend 50% of his earnings on essentials & 30% on non-essential things for a living e.g. luxury items and 20% on savings & Investment.
Essential items — 50% — 10,000 (Housing, Food & Groceries, Education & Insurance)
Non Essential items — 30% — 6000 (Shopping, Subscription etc)
Saving & Investment — 20% — 4000
It can vary from person to person, So no worry. From here, We get to his monthly expense is around 16,000 as a bachelor, Assuming, His expense will increase by 4,000 when he will be married & have a family.
Now, the total Monthly Expense to maintain his current lifestyle will be around 20,000 per month, Yearly 20,000x12=2,40,000
If he will get 2,40,000 annually, He is actually financially refired, He can later pursue his dream life and of course, can improve his lifestyle once financially retired as per his desires.
So If he wants to get 2,40,000 annually. For this, he has to create a portfolio that can yield annually 8–10% return. (To create a portfolio, That’s another topic to help you out in some other article ), out of which, He can take out the yield of 4% annually, and leave an extra 4–6% yield for future inflation 4%. So he would be able to maintain his current lifestyle.
Here, Sandeep can take out 4% or We can say 1/25,
So we need to multiple above 240000 with 25, To get Sandeep’s today’s financial freedom number 2,40,000*25 = 60,00,000.
If Sandeep has 60,00000 in his portfolio which can yield around 9% annually, He is financially retired to maintain his entire life with his current lifestyle. (It's not just his entire life, even his generation if religiously take out only 4% a year and keep rebalancing the portfolio once in a year )
Obviously, He doesn’t have this amount, But now as he knows the number, He can plan to achieve it say in the next 25 years or more based on his investment in the financial market through SIP ( index funds) using a portion of his monthly salary and continuously increasing his income & investment to achieve his financial freedom.
Sandeep current income is 20,000 out of which he can invest up to 4000 per month, he will keep on increasing the investment amount by 3% annually as his income grow. He required 27–28 Years of time to be financially retired.
To financially retire with the current investment of 4000 per month, With market SIP, with a decent 13% annual return, Starting with zero amount, Sandeep will take 27 years to accumulate today’s 60,00000 ( With inflation of 4% after 27 years he actually required 1,75,00,000 ) later on his entire generation will get 20,000 per month with including inflation of their time, He can withdraw around 57000 per month after 27–28 years, This 57000 will be equivalent to today's 20000 and so on keep on increasing with inflation.
If you try anything less than 25 years, It will increase your SIP amount massively, As compounding works but in long run, So the longer you wait, the smaller the amount.
For example,
Sandeep can achieve the same goal with
1000 per month, it will take 43 years.
2000 per month, it will take 35 years.
3000 per month, it will take 31 years.
4000 per month, it will take 28 years.
5000 per month, it will take 25 years.
10000 per month, it will take 18 years.
14000 per month, it will take 15 years.
Or If Sandeep wants to retire very early in his life when he is young, He has to work upon the other income, For example, he can create a business that can provide him 20000 per month of passive or semi-passive income per month that can cope up with annual inflation of 4%. He can retire at that point.
All values in the above article are just rounded off for the simplicity of the article.
Thanks for your time, You can email or reach out to me on my insta ID akash_kajre or can email me at akajre@gmail.com for your suggestion and advice for my future writings.
