Let’s See how to achieve FIRE (Financial Independence Retire Early)…………

Everyone wants to achieve financial independence early, but don’t know how?? Everyone wants to retire early so that they don’t have to work for a longer period of time. What if I tell you, you could retire around your 40s?? Would that be possible?? YESS, it is possible. It’s a simple rule which each and everyone of you knows if you start early you will be able to achieve early.

Let’s see with some examples how can we do this:-

For Eg you are in your 20s around 25. Let’s figure how can you start your investment journey towards your retirement.

Your Salary – 10,00,000 PA on hand
Your Age – 25
Dependents – None or 2
Earning Period left – 20 approximately

From your salary you could easily save upto to 40% on a monthly basis (83000*40% = 33200) towards a SIP with high risk obviously. Why high risk?? because first you are in your 20s and you don’t have any responsibilities, second you have enough time till you retire, third risk decreases with time if you are investing in equities.

Simple way to understand Power of Compounding is:-
The formula goes somewhat like this A = (P* 1/R)^N.
A – Amount
P – Principal
R – Rate of return
N – Tenure of investment

To achieve the desired amount (A) can be achieved when you have everything in place. If your (A) is higher and N is less then you have to increase either R or P. If your N is higher than automatically your P will decrease. It’s basically to set all things in right place and for that we are there obviously, but should also be clear about the concept.

Now, let’s talk if you are investing 33,200 per month (40% of the salary) in an Equity Mutual Fund for 20 years that is till your age of 45. We will see how the calculation works.

Your Invested Value after 20 years will be = 79,68,000
Your Estimated Returns @14% = 3,57,34,000
Total Value after 20 years = 4,37,02,000

This 4,37,02,000 will serve as your corpus amount at the time of your retirement. What to do once you have achieved this much amount at your age of 45 or 50. Now, it’s the time to generate regular income from this life long. Let’s see some calculations here:-

However, You could invest that corpus accumulated in a Hybrid Mutual Fund with a moderate risk and start an SWP (Systematic Withdrawal Plan). Yes, I know you will be confused that what is all these terms. Let me explain it to you briefly.

Hybrid Funds are a combination of Equity and Debt as an asset class. Hence the risk is moderate, as allocations is divided as per the fund category. Hybrid Funds also have some 3-4 different types of funds category.
1. Hybrid Equity Aggressive (60-65% Equity Allocation)
2. Hybrid Debt Aggressive (60-65% Debt Allocation)
3. Balanced Advantage (Percentage varies as per market scenarios)

This was the brief of Hybrid funds, I hope now you are clear with how hybrid funds work. The average returns expected from these funds is around 9-11% CAGR with a moderate risk.

Now, let’s understand what is SWP?? Systematic Withdrawal Plan, is exact opposite of SIP(Systematic Investment Plan). In SIP the amount is auto-debited from bank account and credited in a particular fund. In SWP, the amount is credited in the bank account from a particular fund in which the lump sum amount is invested. So for eg, if you have invested the above proceeds in balanced advantage mutual funds, you can create a 6-7% P.A SWP on a monthly basis. You can increase or decrease the SWP amount any time. The best way to plan for this is stay invested with your lump sum amount for 1-2 years and then start SWP, your principal will also be increasing day by day and you will be getting a regular income too.

Hence, as per the above corpus and SWP rate (6% P.A) you can get around 218500 on a monthly basis. However, the amount after 10 years even after withdrawing the same amount would be around 6.96 Cr which is almost 7Cr inspite of withdrawing the same amount every month. This will continue for life long and for generations and generations.

Let me know in the comments, did you liked this plan or not???? For any help regarding this you can always contact us and visit our website, we are here to guide you.

-Pooja Patel, CFP CM

2 Responses

  1. Shouldn’t we take inflation into account too because with 20years inflation would be significant impact.

    1. Yes Inflation is taken into consideration obviously, this was just to explain the concept that how power of compounding works and people needs to start investing as early as they can.

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