The concept of retiring early is linked to the idea of “Financial Independence, Retire Early (FIRE)”. It was generated through the book “Your Money or Your Life” by Vicki Robin and Joe Dominguez. The idea revolves around three major points viz., passive income, extreme savings, and frugality.
FIRE:
- Passive Income:
- The basic idea behind the concept is that “instead of you working for the money (i.e., active income), the money should work for you (i.e., passive income)”.
- For example, if I had to earn money, I had to put physical and mental effort into writing content by researching various articles and using my knowledge hub. And then I would receive a sum of money. This is called active income. On the other hand, if my money is invested in stocks, the returns would grow automatically as per the performance of the invested stocks. This is called passive income.
- So, the first step of financial independence is achieved when your passive income exceeds active income.
- Extreme Savings:
- The normal savings ratio is 50:30:20. You can allocate 50% for your needs, 30% for luxurious needs, and 20% for investment (net savings).
- However, extreme savings refers to “first save and then spend”. Net savings should be at least 50 to 70% of total income. A balance should be available for various expenses. Now, you have to prioritize those expenses within this boundary. It connects to the next important point. i.e., Frugality.
- Frugality:
- It refers to spending with a cautious mind. Every single time you wish to spend, you should think twice about whether you need it. It is about controlling your emotions for food, shopping, luxurious expenses, and avoiding unnecessary expenses.
Calculating retirement age:
- Calculate your target retirement on the first day of your job. Multiply the number of annual expenses by 25. That should be your retirement corpus.
- Further, what should be the annual withdrawal from the retirement year? As per the FIRE concept, you can consider 4% as the annual withdrawal rate.
- There is a website where you put the details and get your retirement age as per the present scenario.
Conclusion:
Early retirement would help you become financially independent at an early age. You can pursue your other dreams like owning a start-up company, enjoying life, travels, etc. Life becomes stress-free, and you can enjoy it to the fullest.
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