Reasons to become Financially Independent.

Its everyone’s wish to be financially independent, But only a few individuals actually get there.

What could be the reason?

There could be a lot of reasons but financial independence is not something that just happens over time. It requires one to have a serious plan and more importantly, committing to that plan. And that’s easier said than done.

I did not intend to get rich. I just wanted to get independent.” - Charlie Munger

Once you get comfortable with the whole idea of financial independence or early retirement, then I am sure you would be wondering How much money do I need to Retire Early in Pakistan? Or how much is enough for Financial Independence & Retire Early in Pakistan?

Getting the right amount for regular retirement is hard as it is. And here, we are talking about early retirement.

Here is a rule of thumb that can get you going.

A commonly known one is – having a corpus equal to at least 25 times your annual expenses.

This may be enough for some people but may not be for many others. For some 30X or 40X may be a more appropriate size. It depends on a range of factors like current age, age of early retirement, life expectancy assumption, inflation % assumption before and after retirement, return estimates before and after early retirement and several other more serious factors like the sequence of returns risk, etc.

But as mentioned before said, if you are just beginning your journey – then the exact accuracy doesn’t matter and you can have at least some target in front of you – which I think is a good one provided by the 25X, where X is your annual expenses.

You will, regardless, require several years to reach that first.  So, relax about being that accurate.

But as you get closer to your goal and/or the portfolio size grows, you need to run numbers more carefully and have additional buffers to make your early retirement plan more robust. And if it sadly means delaying it by a few years or saving more, then so be it. Better be safe than sorry when you are older.

So 25X is a good aim to have.

If the X (i.e. Annual Expense) is small, you can save more and, in turn, reach the target of 25X faster.

Read that again.

And again, if you still don’t understand its importance.

Let’s take a small hypothetical example to make this idea crystal clear:

Suppose your annual income is Rs 12 lac. And your annual expenses (i.e. X) are Rs 8 lac.

So, if we were to use the 25X thumb rule, then you would need 25 times Rs 8 lac – which is Rs 2 Cr as Early Retirement Corpus. And to achieve it, you will have Rs 4 lac every year (Rs 12 lac income minus Rs 8 lac expenses) to save for the goal.

Note – I have ignored inflation, etc. for simplicity here.

Now remember what I said earlier – If the X (i.e. Annual Expense) is smaller, you can save more and in turn, reach the target of 25X faster.

So, let’s make the X a little smaller.

Your annual income is Rs 12 lac. And your smaller annual expenses (i.e. X) are Rs 6 lac (reduced from Rs 8 lac earlier).

Now if we use the 25X thumb rule, then you would need 25 times Rs 6 lac – which is Rs 1.5 Cr as Early Retirement Corpus. And more importantly, to reach it you will have a higher Rs 6 lac every year (Rs 12 lac income minus Rs 6 lac expenses) to save for the goal.

So, the target has reduced from Rs 2 Cr to Rs 1.5 Cr. And you also have a higher amount of Rs 6 lac per year (instead of Rs 4 lac) to save for the goal.

So, it’s a double benefit of having a reduced target and higher savings capability.

Decreasing your expenses help in increasing the savings – this fact along with lower target requirement can be a catalyst to your plan to reach the final corpus earlier.

Assume – If your expenses are low, you will need a smaller corpus to support it for years to come. And a smaller corpus means that you will require a lesser number of years to achieve it. But if your expenses are high, then not only will your required corpus would be high, but it will also require more time and probably a higher saving rate.

Remember – this 25X figure is just a thumb rule.

The actual number will vary for different people and circumstances.

The idea here was to portray that higher your saving rate, the sooner you can potentially retire.

If you save just 10% of your income, then you can forget about early retirement. You need to save a lot more – like 30, 40 or even more than 50%. But then, that would mean you are sacrificing your present for the future, which is good to an extent but not beyond it. We always know how much money we have but we never know how much time we have. So, we cannot entirely sacrifice the present.

Financial independence is a hard nut to crack that most people don’t achieve.

But even if you were to achieve it partially, even then it would provide you with a lot of power over your financial life. A stable early retirement corpus with sensible return expectations will cover fundamental living expenses for longer than your life expectancy. That’s an achievement which is good enough, regardless of when you achieve it.

The bottom line is that we all have different goals and we should do what is necessary to fulfill them. If financial independence is not one of them, then you can ignore it. But if it is and it’s more than a passing wish, then you need to do something about it. The independence that a big corpus provides is amazing, it’s a sense of freedom that one can only imagine

So, if you are planning early retirement in Pakistan, then sit up and take action. Just wishing and asking questions like how much money I need to retire early in Pakistan will not be enough.