Tuesday, 18 October 2011

Early Retirement : How much to save?

The key determinant of success to achieve your early retirement goals is your savings rate while you are working.  The higher the percentage of savings, the better chance you have of meeting your early retirement goal.  Now of course, the level of savings you can achieve is also dependent on your monthly income levels.  At the start of your career, when your monthly income levels are low, it will be very difficult to achieve a significant savings percentage.  Since you still have to meet your basic expenses for food, housing, clothes etc (the basic essentials) it will be difficult to increase your savings percentage.  However, as your career advances, and your monthly income levels go up, you should be able to start increasing your savings percentage, as typically your monthly basic expenses will not increase much after a certain level.  Particularly in the Indian context, it should be possible to save a very large percentage of your take home salary, if you stick with the principles of LBYM and do not unnecessarily extend your lifestyle. 

I always like to take aggressive goals when it comes to enabling my early retirement.  So far starters I am going to target a 85% savings rate on my monthly income.  This might sound like a huge portion of my monthly earnings, but the objective here is to be as aggressive as possible and find ways to reduce my monthly expenses to enable this savings target.  Just to be clear about my accounting method, here are a few assumptions I will make. 

1. The 85% savings target applies to both my and my wife's monthly take home income.  Any yearly bonuses etc will be additional savings and not accounted for in the 85%
2. All investments in stocks, MFs, real estate EMIs, insurance premiums, are considered as savings for the purposes of this exercise.
3. All expenses in the form of monthly food, entertainment, vacation spending, intermittent medical expenses, utility payments etc are NOT savings and will need to be accommodated in the remaining monthly 15%

Now that I have written this, it makes me wonder if I can achieve this level of aggressive savings, and importantly is there a way for me to track that I am really meeting these savings goals.  My next post will cover how I intend to measure my savings rate, to check how I am doing when compared to the target of 85%


  1. Your calculation is not possible at all in practical scenarios... Suggest some practical scenarios

    1. Hi Vivek,

      Thanks for visiting. I would differ on your assessment of what is practical and what is not. For starters I acknowledge in this article, that early in ones career it might be difficult to build up a large savings rate. My scenario is based on a 2 income family, where we strive to save one income almost entirely. This is definitely something that can be done, and in fact is probably done by many working couples. More importantly, this is a goal that we have set for ourselves, and I will report back in a few months, on how we are doing when compared to this goal.