How to Retire Early in India: A Guide to Achieving Financial Freedom

Early retirement is enticing. Imagine trading your 9-to-5 for Goan beaches, waking up to the sounds of chirping birds instead of alarms, or having the absolute freedom to pursue your hobbies without the pressure of making a regular paycheck to meet your needs and wants.  

Some of us aspire to retire early, but for some, life has thrown a curveball, compelling them to hand in their boots and call it quits before the official retirement age. Whether early retirement is a dream or a compulsion, strategic planning and prudent financial decisions can help you be in the best financial shape for all life’s challenges.  

Starting your retirement planning journey early in your career will give you ample time for your investments to compound. Here is how you can design your early retirement plan. 

Understanding Early Retirement in India  

Early retirement refers to quitting the workforce before you reach the official retirement age. In India, the retirement age ranges between 58 and 65 years, depending on your job. While there is no set age for early retirement, people aspiring to retire early plan on quitting their jobs in their 40s or 50s, or even earlier, depending on their profession and goals. 

Why More Indians Are Considering Early Retirement?  

The concept of early retirement is fast gaining traction amongst Indian millennials and Gen Zs. The pandemic has brought in a paradigm shift in behavior and made Indians more financially conscious and disciplined.  

According to the PGIM India Mutual Fund Retirement Readiness Survey 2023, 67% of Indians already have a retirement plan in place. The number is up from 49%, as witnessed in the previous survey conducted in 2020.  

The retirement planning journey of Indians starts around the age of 33.  Here are the factors driving this trend of early retirement:  

• Shortening career span

The work environment is evolving fast. The career spans are decreasing, especially for those in fast-paced fields like tech, banking, etc. The fear of being redundant before retirement motivates young Indians to plan for retirement.  

• Professional fatigue

While the career span is shortening, it is also becoming much more demanding than it was a decade ago. The idea of being able to quit the corporate rat race is another motivator behind young Indian’s preference for early retirement.  

• Desire for freedom to follow passion and hobbies

A demanding career doesn’t give you the freedom to pursue your hobbies or passions, and it doesn’t permit you to spend quality time with family and friends.   

Here is an early retirement plan that can help young Indians enjoy their retirement life without worrying about money.  

 Financial Independence, Retire Early (FIRE) movement and its relevance in India  

FIRE is a lifestyle philosophy that advocates aggressive savings and investing to achieve financial freedom years before the designated retirement age.  

The FIRE plan aims to accumulate enough wealth to cover all living expenses via passive income streams, enabling you to retire early.  

Key principles of FIRE include

Here are the key FIRE principles that you should follow for early retirement in India:  

• Save aggressively: Aim to save 50-70% of your monthly income early on in your career to get the maximum benefit of compounding.  

• Create passive income sources: Invest in assets such as fixed income securities, real estate, and dividend-paying stocks to create passive income streams.  

• Keep track of lifestyle inflation: As you advance in your career, don’t let lifestyle inflation get the better of you. FIRE is all about living frugally by prioritizing essential expenses over luxury spending.  

How to Create an Early Retirement Plan 

Someone wishing to retire early will have to depend on their savings for a very long time. Additionally, life expectancy in India is rising. It is estimated that young Indians in their 20s and 30s will have a life expectancy of 80+ years.  

If you plan to retire in your 40s, you must save strategically and aggressively during your active years, as you will have to draw from your retirement corpus for over 40 years.  

Here are the steps to create an early retirement plan that meets your goals.  

Set SMART Financial Goals  

Your financial goals should be SMART, i.e., Specific, Measurable, Achievable, Realistic, and Time-bound.  

Example of a SMART financial goal – Raj, a 30-year-old software engineer with a monthly salary of Rs. 3 lakh and current portfolio value of Rs. 75 lakhs, wishes to retire in 2035 with a corpus of Rs. 5 crores. Raj must save Rs. 2 lakh per month to achieve his goal.  

Here are the steps you can follow to set SMART early retirement financial goals:  

1. Define your retirement age

Decide the age at which you want to quit working permanently. This depends on your age, career aspirations, and desired lifestyle.  

2. Estimate your post-retirement expenses

Calculate your monthly and yearly expenses needed to sustain your lifestyle post-retirement. Account for day-to-day expenses, healthcare costs, and leisure expenses. Keep a little cushion so you don’t underestimate your expenses.  

3. Account for Inflation

Inflation can diminish the value of your savings over time. Therefore, you cannot ignore the impact of inflation when creating your early retirement plan. India is a growing economy; thus, inflation ranges between 5% and 7%. Factor inflation into your calculation to ensure your savings retain their purchasing power over time.  

4. Build a contingency fund

Early retirees have a long time to depend on their savings. It is advisable to build a healthy contingency fund for any big, unforeseen expenses, such as home repairs and renovations, family emergencies, etc. This will help you preserve your capital and keep you secure throughout your retirement.  

SMART financial goals will help chart a clear roadmap, helping you guide with savings and investments during your working years.  

Calculating Your FIRE Number  

The SMART financial goals involve estimating your monthly and yearly expenses post-retirement. Here is how to calculate these and arrive at your FIRE number.  

1. Determine your yearly post-retirement expenses

Calculate your current monthly expenses and multiply them by 12 to know your yearly costs.  

For example, if your current monthly expenses are Rs. 65,000. That comes to Rs. 7,80,000 a year. Say, you are 35 years old and wish to retire in 10 years. Use an inflation calculator to adjust your yearly expenses for inflation impact.  

• The inflation-adjusted expenses come to Rs. 15.7 lakh.  

• You will need Rs. 15.7 lakh in the first year after retirement.  

• If the inflation stays around 5%, your yearly expenses will also increase at the same rate.  

• Therefore, the second year after retirement, your yearly expenses will be Rs. 15.7 lakh + 5%, which comes to Rs. 16.5 lakh.  

• Your yearly expense will increase by the inflation rate each year post-retirement.  

2. Apply the rule of 25 or 30

Multiply your post-retirement annual expenses by 25 if you plan to retire in your mid-40s or later. If you are planning to retire earlier than that, multiply your yearly post-retirement expenditures by 30.  

• Retirement in mid-40s = Rs. 15.70 lakh * 25 

• FIRE number – Rs. 3.93 crores  

• Retirement in mid-30s or early-40s = Rs. 15.70 lakh * 30  

• FIRE number – Rs. 4.71 crores  

That should be the figure you target. 

3. Adjust for desired lifestyle

Consider your desired lifestyle.  

• Lean FIRE: A frugal lifestyle choice post-retirement. This means lower savings and a relatively smaller corpus, as withdrawals will be lower.  

• Standard FIRE: Continuation of the same lifestyle as pre-retirement. The above calculated numbers are per the Standard FIRE.  

• Fat FIRE: Luxurious lifestyle goal post-retirement. This means higher savings or delaying retirement, as the retirement corpus requirements will increase significantly.  

Think about your post-retirement lifestyle aspiration and adjust your FIRE number to match your goal.  

Note: The FIRE number in crores may be intimidating. But this exercise is to help you plan your retirement so that you can save and strategically invest your savings to reach your FIRE number.  

This is how a model portfolio of a FIRE aspirant would look: 

• Emergency Fund – Six to eight months of living expenses invested in safe, liquid assets such as fixed deposits, government securities, etc. 

• Goal–oriented investments with a horizon of 1 to 5 years: Investment for short-to medium-term goals through fixed income assets such as corporate bonds, debt mutual funds, etc. This takes the volatility out of the equation.  

• Retirement Funds: A fund built for an investment horizon of 10 years or more through a well-diversified portfolio, with a considerable weightage given to equity mutual funds to gain the benefit of compounding.  

It is always better to postpone retirement by a few years if you cannot reach your FIRE number by your desired retirement age. Working for a few more years is better than facing a cash crunch later in life, when your employability would have drastically reduced.  

Best Investment Strategies for Early Retirement in India  

An early retirement plan requires a different investment strategy for pre- and post-retirement. The pre-retirement strategy will focus on growth, while the post-retirement strategy will focus on passive income generation and capital protection. Here’s how to manage your pre- and post-retirement investments.  

High-Yield Investments for Faster Growth  

Long-term investments with a horizon of 5 years or more in your pre-retirement portfolio should be held in high-yield assets.  

Remembering the underlying finance rule: ‘ The higher the risk, the higher the returns.’ 

Remember this and your risk-taking ability when contemplating a high-return instrument such as a small-cap mutual fund or a very high coupon rate bond. You can build a well-diversified investment portfolio of growth assets based on your investment horizon and risk appetite. Here are some of the high-yield options you can consider: 

• Equity Mutual Fund: Offers a higher return over the long run but can also pose comparatively higher risk 

• High coupon rate, stable-rated debt instruments: Helps balance the portfolio risk while providing a higher return 

• Stocks: yield substantial gains but pose higher risk 

• Real estate: Rental income can help develop a passive income stream while also providing diversification benefits. 

Passive Income Sources to Sustain Post-Retirement  

Post-retirement, although your expenses are regular, your source of income is not. However, you can have passive-income sources to create a regular cash inflow to preserve your capital while you continue enjoying your life.  

You can start moving a portion of your investments to passive-income instruments as you move closer to retirement.  

Let’s continue with Raj’s example; The retirement corpus is Rs. 5 crores. The yearly expenses are Rs. 15.7 lakh.  

Here, he can invest Rs. 2 crore in long-term investment-grade debt securities in a way that the average coupon rate comes to 9%. This will yield him a yearly interest income of Rs. 18 lakhs. The extra Rs. 1.3 lakhs will account for extraordinary expenses.  

The remaining Rs. 3 crore can be held in relatively low-risk growth assets such as index funds, blue chip equities, high-dividend yield stocks, etc. This division will protect his capital, provide for regular expenses, and grow this corpus. The growth portion will help him if his expenses increase in the future or his retirement is extended because of a longer-than-expected lifespan.  

The following passive income alternatives can be utilized to ensure financial stability during retirement: 

• G-secs: Government securities carry a sovereign guarantee and thus are safe. They could be added to your portfolio to add stability.  

• Bonds: Corporate bonds provide a higher coupon rate, ensuring your capital doesn’t erode over time.  

• Fixed deposits: Low-risk instruments are ideal for parking emergency funds and short-term funds, as interest payments and tenure are fixed.  

• Dividend-yield stocks: Certain stocks pay a regular dividend, which can contribute to your cash flow. However, dividends are not fixed or compulsory, and thus, a higher portion should not be invested in these.  

• Rental income: Commercial and residential real estate investments can help you generate a rental cash flow post-retirement.  

How to Retire Early by Reducing Expenses and Optimizing Savings?  

While early retirement is a dream, it requires strategic decision-making and financial planning. Here are some steps you can take in your 20s and 30s to make your dream of early retirement a reality:  

• Budgeting: Track your monthly spending and frivolous costs to optimize savings.  

• Adjust your lifestyle: As you progress in your career, it is easy to get carried away by lifestyle inflation. Introspect and adjust your lifestyle to a comfortable level, cutting out frivolous expenses to increase your savings.  

• Emergency Fund: Build a reserve fund so your capital is not impacted in emergencies.  

• Maintain investment discipline: Automate your investments to maintain discipline. Avoid panic when deciding to sell or buy investments, as retirement is a long-term game. Additionally, max out all tax-saving investments to minimize your tax liability.  

Tax Planning for Early Retirement in India  

Efficient tax planning plays a pivotal role in maximizing savings. This will only apply to taxpayers opting for the old regime. Some of the tried and tested tax planning strategies for the old income tax regime are:  

• Maxing out your Employee Provident Fund contributions. You can also opt for contributions to the National Pension Scheme (NPS) and Equity Linked Savings Scheme (ELSS). 

• Utilize your 80C deductions. 

• Also, look at other sections such as:  

• Section 80D (Health Insurance Premiums): Claim health insurance paid for yourself and dependents. You can claim Rs. 25,000 for yourself, spouse, and ki and an additional Rs. 50,000 if you have insured senior citizen parents. This amounts to Rs. 75,000.  

• Section 80E (Education Loan Interest): Deduct the full interest paid on education loans for up to eight years. 

• Section 80G (Donations): Claim deductions of 50% or 100% on donations to eligible charities and relief funds. 

• Section 80EEA (Home Loan Interest for First-Time Buyers): Deduct an additional ₹1.5 lakh on home loan interest if you’re a first-time buyer, beyond the ₹2 lakh limit under Section 24(b). 

• Plan for efficient loss and gain harvesting for your equity and bond investments.  

• Make efficient use of debt. Interest on a home loan is tax-deductible, and you earn a higher rate of return on your investments when you repay the loan in installments as opposed to lump-sum payments when making a big-ticket expense such as buying a car or a house. 

• Plan your withdrawals strategically to minimize your tax liability.   

• Efficient tax planning is applicable both pre- and post-retirement.  

Key Challenges in Early Retirement and How to Overcome Them  

Early retirement comes with the following challenges:  

• Underestimating Inflation: Early Retirement means saving up for a longer time, and inflation is at play during that time. Inflation diminishes the purchasing power of the Rupee. It is better to overestimate inflation to end up with a higher corpus rather than facing a money crunch in retirement.  

• Solution: Make a conservative inflation assumption, even if it seems high, and invest in inflation-beating asset classes.  

• Healthcare Costs: According to the RBI, the economy’s annual inflation is around 4%. The annual health care inflation for 2024 was 10%! Any health emergency in your family can significantly impact your capital.   

• Solution: Purchase comprehensive health insurance and opt for adequate coverage. Ideal health insurance coverage should be a minimum of Rs. 15 lakhs per person or a family floater of Rs. 50 lakhs for a family of 4.  

• Market Volatility: Market fluctuations and resulting investment decisions, like panic selling, can impact investment returns.  

• Solution: Ignore market volatility if you have an investment horizon of 5 years or more. As your retirement age approaches, start shifting some of your investments to stable assets to safeguard your investment portfolio against market volatility.  

Final Words

Retiring early requires dedication, aggressive savings, strategic investments, and discipline. You can achieve your goal of early retirement by setting clear financial goals, investing wisely, reducing your expenses, and preparing for contingencies.  

While early retirement is enticing, no magic age defines early retirement. You can calculate your FIRE number and choose a retirement age that helps you to achieve your desired corpus comfortably. This is because while savings are essential, enjoying life and spending on experiences as you grow is also important.  

FAQs for Early Retirement  in India

How Early Is Early Retirement​?  

The retirement age in India is 60. Early Retirement refers to quitting the workforce in one’s 40s or 50s.  

Is Early Retirement a Good Idea​?  

Early Retirement can be beneficial and enjoyable if you have enough investments and passive income.  

How To Prepare for Early Retirement​?  

Preparing for early retirement involves defining your desired retirement age, calculating your FIRE number, reducing expenses to optimize savings, investing in growth assets, and building passive income streams to sustain your post-retirement lifestyle.  

How Much Do I Need to Retire Early​?  

You need 25 times your post-retirement yearly expense to quit the workforce early. For example, if annual expenses are ₹10 lakhs, you need ₹2.5 crores saved.