Retirement is not an age; it is a financial number. In the past, people worked until 60, got a gold watch, and lived on a pension for 10 years until they died. Today, pensions are gone, life expectancy is rising (80+), and people want to retire at 40 or 50.
This has given rise to the F.I.R.E. movement (Financial Independence, Retire Early). The core idea is simple: You are retired the moment your passive income exceeds your living expenses. You might choose to continue working because you love it, but you don't have to work to survive.
In this module, we will calculate exactly how much money you need to never work again.
1. The Magic Number: How Much is Enough?
Most people guess their retirement number ("I think ₹5 Crores is enough"). Guessing is dangerous. We use math.
The standard rule in the US is the 25x Rule. In India, due to higher inflation and lower real returns on safe assets, we prefer the 30x Rule.
Why 30x? This is derived from the "Safe Withdrawal Rate." If you withdraw 3.33% of your portfolio annually (adjusted for inflation), and your portfolio grows at 8-10% (conservative estimate), your money should historically last for 40-50 years.
2. The F.I.R.E. Types
Not everyone wants the same lifestyle. Financial Independence comes in flavors:
- Lean FIRE: Retiring on a bare-bones budget (e.g., living in a Tier-2 city with minimal expenses). Requires a smaller corpus (20x).
- Fat FIRE: Retiring with a luxurious lifestyle, travel, and no compromise. Requires a massive corpus (50x).
- Barista FIRE: You save enough to cover base expenses, but you work a low-stress, part-time job (like a barista) to cover "fun" money and health insurance.
3. The Silent Killer: Longevity Risk
The biggest risk in retirement is not dying too soon; it is living too long. If you retire at 60 and live to 95, your money must last 35 years without a salary.
During these 35 years, inflation will triple or quadruple your expenses. A loaf of bread that costs ₹40 today might cost ₹150 when you are 80. If your investments are all in Fixed Deposits (FDs), inflation will eat your purchasing power, and you will run out of money at age 75.
4. The Glide Path: Asset Allocation by Age
How should your portfolio change as you age? We use a "Glide Path."
Accumulation Phase (Age 25-50): You have a salary. You can take risks. High Equity allocation to grow the corpus.
Distribution Phase (Age 60+): You have no salary. You cannot afford a 50% market crash. High Debt allocation for stability.
Notice that Equity never goes to zero. Even at age 80, you keep some equity to fight inflation.
5. The Bucket Strategy: Managing Money in Retirement
Once you hit your number (e.g., ₹3 Crores), where do you put it? You can't put it all in the bank (low return) or all in stocks (high risk). We use the Three Bucket Strategy.
Money needed for expenses in the next 3 years. Must be 100% safe.
Money needed later. Needs to beat inflation slightly with moderate safety.
Money not needed for a decade. Let it grow aggressively.
How it works: You spend from Bucket 1. As Bucket 1 empties, you refill it by selling profits from Bucket 2. Bucket 2 is refilled by Bucket 3. This ensures you never have to sell stocks (Bucket 3) during a market crash to buy groceries.
6. NPS vs. EPF vs. PPF
In India, government-backed retirement schemes form the debt backbone.
- EPF (Employee Provident Fund): For salaried. High interest, tax-free. Do not withdraw this when changing jobs! Let it compound.
- PPF (Public Provident Fund): Safe, tax-free, 15-year lock-in. Great for the debt part of your portfolio.
- NPS (National Pension System): Low cost, market-linked (equity exposure allowed). However, it has a lock-in until age 60 and forced annuity (pension) purchase rules.
Summary of Module 7
Retirement planning is simply reverse-engineering your life. Determine your expenses, multiply by 30, and that is your finish line. Once you reach it, use the Bucket Strategy to turn that pile of money into a monthly paycheck.
However, building this corpus is only half the battle. The government wants a share of your wealth. In the next module, we discuss how to legally minimize this share: Tax Planning.