It's time to Retire the Early Retirement

“Money’s greatest intrinsic value—and this can’t be overstated—is its ability to give you control over your time.”

- Morgan Housel

The meaning of retirement is changing. Earlier retirement was known to be a period when people were believed to be physically and mentally unfit to engage in full-time work. But increasingly people are considering retiring in their 40s, at the best of their health, to travel more and to spend time in leisure and social activities than working for long hours. An exciting idea? Isn’t that what many of us desire? But before jumping on to an early wrap-up, it would be good to ask “Could I continue to maintain my lifestyle till perpetuity? While early retirement is a fancy idea, it is not for everyone!

Early retirement is perhaps a good option for those with good reasons to believe that their investment portfolios will be sufficient for their lifetimes. For others, this could be a definite pathway to financial distress unless one is fortunate to have someone by their side to look after all their and their family’s expenses till perpetuity. Preserving and growing capital well in time to years leading to retirement is a good way to safeguard your golden years.

The average lifespan of human beings has been increasing to reach over 80 years in the developed world in 2022 compared to just 45-46 years in the 1950s. It is heartening to see that medical advancements and better quality of life have added an average of 20 years to the retired life. According to the UN, average life expectancy is further expected to go up to 85 years by 2060. At average life expectancy, currently, people are spending almost 20 years of their lives without any income from their salaries. And those who happen to be in the top half averaging 90 years and more are spending 30 years without an active income! With people living longer and healthier lives, planning for retirement early in their productive years and continuing till the years leading to retirement is no longer a choice but a necessity for most of us!

Planning for retirement is crucial. The traditional school of thought divides the lifecycle of investing into different phases as per investors’ age and risk appetite – Accumulation, Consolidation and Spending phases. People start earning at around 25 years of age, and as per traditional school, they must start investing in gain-focused strategies to potentially earn better returns until the age of around 35. Afterwards, they should consolidate and accumulate their wealth by balancing high-capital gain investments and lower-risk assets to plan for their retirement years when the spending/gifting phase begins. From 60 years onwards, they should plan to invest in low-risk, dividend-yielding, and interest-yielding strategies.

However, conventional investment strategies do not consider major shifts in demographics and life stages. Our life expectancy is improving; people are getting married in their late 30s, and having kids till their late 30s or early 40s; they intend to retire at 60 years or earlier. Therefore, investment strategy should be looked at from a different lens. One must first estimate how much of the retirement corpus is needed at an age of 60 years.

Before treading onto the path of retiring early, work on the numbers and assess if a stage has come when your portfolio could continue supporting your lifestyle till perpetuity. Let’s do quick math on a 45-year-old, resident of Mumbai. The current expenditure basket for him may be around INR 200000 per month consisting of House Rent (INR 50,000 per month), Grocery and dining out( INR 50,000 per month), House help ( INR 20,000 per month), Car maintenance ( INR 20,000 per month) and Miscellaneous expenses ( INR 60,000 - Medical, annual vacation abroad (monthly component)). This means that his current expenses are INR 2400000 (=INR 200000*12) annually. In the next 15 years, assuming the expenditure basket remains the same, he will need INR 6620000 annually to maintain his lifestyle, considering inflation of around 7%. This means that at an age of 60 years, he should get INR 550000 per month returns from his investments to maintain himself. Now, let’s see how much Bank deposits he would need if he intends to live on the interest income at 60 years. At a 6 % annual return, a deposit of INR 110000000 could give him the return required to meet his expenses. So, the 45 years old gentleman would need to plan for building a minimum corpus of INR 11 Cr at 60 years. Such a large corpus is extremely difficult to build if one relies on investing in low-yielding assets such as fixed deposits. But the good news is that investing in the right equity strategies could help you in retiring wealthy and have sufficient capital to maintain your lifestyle.

The traditional wisdom of relying on deposits as you grow older does not preserve your capital, it slowly and steadily consumes it. One needs to understand that capital needs to grow aggressively at each stage – Earn, Accumulate and Aggressively grow is the best mantra for investing at each life stage. Even in your retirement phase, most of your investments should continue to grow in equities if you want to enjoy a good lifestyle even after your retirement. Then how do people who do not sufficiently plan for their retirement survive? They simply cut down on their basic lifestyle expenses – they discontinue dining out; stop travelling internationally; they no longer spend on clothing and accessories – all this for being always short of funds as they did not intelligently plan for their retirement.

Let’s celebrate the years being added to our lives with the progress medical sciences have made, and have the means to enjoy most of these added years.