Another Way to Look at Retirement

Suppose you earn $2,000 per month after taxes today. Let’s say your monthly expenditure is $1,000. By definition, retirement for you means having $1,000 coming into your account for you to take care of your monthly expenditure, without you going to work. Now to make this happen you need to have enough assets that generate such income. $1,000 per month translates into $12,000 a year. A good estimate for returns generated by assets is around 4%. To generate $12,000 a year at 4%, you need to have $300,000 in assets to retire. Today you are saving $1,000 per month, so assuming inflation and salary hike remains 0, you need to save 300 months of salary to retire. That means, to retire you need to save for 25 years!

Obviously, a lot of things have been simplified above, but this was to illustrate the point. This is what people typically do today. What people also do is add house mortgages to this equation which pushes this 25 to 35+ years or they end up working will retirement age.

This example wasn't to scare you but to illustrate the reality. The way out of this loop is by saving with discipline and investing wisely. Investments can be in a whole range of assets that you are comfortable with. Diversification helps minimize the risk but the biggest risk is inflation and beating that should be a basic requirement for your portfolio.

I started doing it rather later than I should have. I’m investing mostly in stocks and a few ETFs. I am looking to grow my dividend income through these investments over time to one day make me financially independent and I want that day to come a lot earlier than 60 years of age. You can chose from other asset classes like Real Estate and Mutual Funds as well depending on your comfort and preference. In fact, if you are not good at analyzing stocks you are better off paying fees to Mutual fund managers. Stock investments can grow over 10% annually over the long term and historically outperform most other asset classes. If done smartly, this could reduce the number of years one needs to save for retirement as compounding becomes your dear friend.