How To Invest For Early Retirement
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Understanding Early Retirement
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Ever wondered how much money you need to retire? Imagine basking on a beach, drinking margaritas while your friends are stuck in their monotonous nine-to-five jobs. Gone are the days where we work until sixty. Most people did that because they never understood how much money they actually needed.
Retiring early, also known as FIRE (Financial Independence Retire Early), is about accumulating enough money so that your investments generate enough income to cover your yearly expenses. Joe Dominguez, a pioneer of FIRE, achieved it at age thirty-one and never had to work for money again. Can you say the same at thirty-one or forty-one?
Calculating Your FIRE Number
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To retire early, you must understand your FIRE number. Over the years, different types of FIRE numbers have emerged: Lean FIRE, Normal FIRE, and Fat FIRE. Let's dive into the most important types.
1. Lean FIRE
Lean FIRE is simply your annual expenses multiplied by twenty. For example, if you spend fifty thousand per month, which is six lakhs a year, your Lean FIRE number is 1.2 crores. However, considering inflation and aiming for financial independence at forty, your Lean FIRE number might increase to 2.3 crores.
Achieving Lean FIRE means you can choose jobs that make you happier, even if they pay less. It allows you to focus on your passions without worrying about money.
2. Normal FIRE
Normal FIRE is twenty-five times your annual expenses. Research from Trinity College found that if you save twenty-five times your annual expenses and withdraw four percent annually, your corpus will last for thirty to forty years. For instance, if you spend fifty thousand a month, your Normal FIRE number is 1.5 crores.
3. Fat FIRE
Fat FIRE requires fifty times your annual expenses. This number allows you to spend more and leave a significant amount for your kids. However, focusing on Normal FIRE might be more practical as it avoids unnecessary stress.
Steps to Achieve Your FIRE Number
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Now that you know your FIRE number, how do you achieve it? There are three pillars of achieving FIRE: increasing your income, increasing your savings, and investing wisely.
1. Increase Your Income
Increasing your income is crucial. While you might already know to ask for a raise or get a better-paying job, structuring your salary for tax savings can also help. Consider starting a side gig to boost your income further.
2. Increase Your Savings
Have you heard of the fifty-thirty-twenty rule? While popular, it might lead to unnecessary spending. Instead, predict your monthly expenses, create a budget, and invest the balance at the beginning of each month.
3. Invest Wisely
Investing is the third pillar. Despite the stock market's ups and downs, equity remains the best-performing asset class. However, putting all your money in equity is risky due to potential drawdowns. Diversify your investments across various asset classes to ensure stability.
Asset Allocation
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Asset allocation involves distributing your investments across different asset classes like equity, debt, and gold. For example, sixty percent in domestic equity, ten percent in US equity, fifteen percent in debt, five percent in gold, five percent in crypto, and five percent in real estate.
Sub Asset Allocation
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Within each asset class, further divide your investments. In domestic equity, for instance, forty percent in large cap funds, forty percent in mid cap funds, and twenty percent in small cap funds. Rebalance your portfolio every six months to one year to maintain these allocations.
Rebalancing Your Portfolio
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Rebalancing ensures your investments stay aligned with your goals. Markets fluctuate, so adjusting your portfolio periodically is essential. Without a proper system, your investment strategy might falter.
Why Start Early?
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Many young people think their twenties are for partying and having fun. However, focusing solely on enjoyment can make life difficult as you grow older. Discipline yourself early on, create budgets, and manage your money effectively to ensure a comfortable future.
Start planning now to enjoy a carefree life later.
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