How to retire at the age of 40 in India?

9 min read • Updated 18 November 2022
Written by Krishna Deshmukh
How to Retire at the Age of 40 in India

Owing to the rising inflation, working hard, or working to expand your purchasing power is not enough to live a prosperous life. Consequently, retiring at 60 is no longer sufficient for gathering enough resources to survive. 

Hence, if you want to retire by 40, you will need a well-structured plan, understand your requirements, and execute this decision without hesitation. It might be a tough road, but it’s not impossible to retire early at the age of 40 with enough savings that will last you a lifetime. 

Defining Early Retirement and Financial Freedom

The normal age of retirement in India varies between 60 and 65 years. The idea of retirement at 40 does not necessarily mean an end to your career but rather a new stress-free beginning. 

To break away from the shackles of a routine work schedule is impossible without financial independence. Financial independence is an achievable goal whereby retirees can free themselves from unnecessary debts and liabilities and have sufficient savings to lead a comfortable life.  

The FIRE Movement

Early retirees across the globe have been following the Financial Independence Retire Early (FIRE) policy to understand the feasibility of adopting an early retirement. This principle goes beyond the attitude of extreme savings and building substantial funds. Instead, it involves leading a peaceful and financially independent life. 

Introduced by the 1992 best-selling book Your Money or Your Life by Vicki Robin and Joe Dominguez, the FIRE principle can be represented with a formula that estimates your net retirement fund and consequent withdrawal. Planning and saving for your retirement involve setting an achievable primary target. You may begin by controlling your expenses on depreciating assets like technical gadgets and automobiles. Experts believe that finding a secondary income source helps maintain a constant capital inflow.   

However, the FIRE principle does not apply to everyone aiming to retire early. The principle assumes an individual has a large income and that he/she will draw down a certain percentage every year irrespective of inflation or emergencies, hence the principle does not apply to everyone. 

Tips to follow if you want to retire by 40

Follow these 10 tips if you want to retire by 40

An average working professional often faces some questions around retirement– ‘how to retire early?’ or ‘How much wealth do I need to make early retirement possible?’. Although it is technically impossible to arrive at a single answer that satisfies everyone; here are 10  tips that might help you retire by the age of 40 in India. 

  1. Define retirement in your case: 

The global definition of retirement is a period free from a consistent work schedule and financially independent enough to live a prosperous life. However, choosing to stop working or do something you desire is subjective and personal. Therefore, you must begin by defining retirement in your case. 

Many working professionals begin their entrepreneurial venture after retirement, while others may pursue a creative enterprise. Before you decide on retiring at the age of 40, make sure your definition of retirement suits your purpose.  

  1. Organise your life with a sense of purpose:

The excitement of retiring early tends to fade soon. As a result, many early retirees face the dilemma of returning to their work schedule or selling their fixed assets to maintain the same living standards.

However, the key to happiness after early retirement lies in making minimal lifestyle changes you can afford and enjoy. Also, one needs to understand the difference between needs and wants in order to make smart financial decisions.  Instilling a sense of purpose helps balance the two variables. Moreover, early retirement can become happier if you can express gratitude continuously and look forward to new things that add value and make a change.   

  1. Take care of your health:

Recently after the sudden demise of India’s ‘Big Bull’ Rakesh Jhunjunwala, an advice that he shared in the past surfaced on the Internet. The late investment giant during an interview had said, “ I would encourage everybody to invest the most in their health.”  Even one of the wealthiest people in India felt that investing in health should be everyone’s top priority.

If you plan to retire at the age of 40, your early retirement phase should be smoother with an active daily routine involving physical exercises. An early retiree is in a slightly better position regarding flexibility and endurance than a normal retiree. Make sure your daily activities do not over-stress you. It is advisable to keep intoxications to a minimum after early retirement to save expenses and your body strength.  

  1. Save at least 60% of your income before retiring:

Many early retirees face the common question – ‘how much money is enough to retire at the age of 40 in India?’. The FIRE principle advises early retirees to accumulate at least 25 times their annual expenses at a constant withdrawal rate of 4% per year. Despite its stringency, this rule gives an early retiree more time to concentrate on maintaining an investment portfolio. 

Many early retirees claim that an 80% reduction in annual income after retirement forces them to make severe lifestyle changes in contrast with their spending habits. Therefore, to leave your post-retirement period with considerable savings, ensure saving at least 60-70% of your pre-retirement income. 

  1. Invest more in low-risk options: 

After visualising your post-retirement scenario, consider the types of investments that can fetch you a good amount of money. Owing to the varying return on investments for each option, you may consider allocating your assets in terms of their creditworthiness, capacity to generate returns or liquidity. Many mutual funds offer Systematic Investment Plans (SIP) that can provide decent returns and good interest rates. 

Several Central government-sponsored schemes for retirees that provide decent yields include Pradhan Mantri Vaya Vandana Yojana (for retirees above 60), Post Office Monthly Income Scheme or Fixed Deposits. Although these are low-risk options, experts advise early retirees with decent risk appetites to invest in equity or debt. Debt mutual funds provide decent returns with comparatively lesser risk than equities, thus securing your capital and making them more liquid. 

  1. Clear off debts:

Imagine paying 60% of your annual post-retirement expenditure on clearing off your home debt or car loans, sounds miserable, right? With credit card interest rates soaring, you must consider not getting involved in excess debts. Experts believe that your post-retirement stage should not involve an excess of 28% of your total income on clearing home debt, while a maximum of 36% of your annual income should go into clearing overall debts. 

Remember that debts are high-cost and taxable liabilities that eat away your annual income after retirement. Nevertheless, since properties are potentially appreciating assets, home debts might ultimately add value. 

  1. Take note of the economic variables:

From an economic perspective, an adverse economic condition like a recession causes unemployment and a subsequent economic downturn. Savings and investments are two key elements that an early retiree should keep in mind. Any changes in the country’s fiscal or monetary policies tend to transform the tax schedule, investment options and the stock market. 

If you retire early, ensure you have a clear idea of your inflation-adjusted income and expenditures. In addition, an early retiree should understand the annual budget to look for potential income sources or liabilities.  

  1. Avoid purchasing tangible assets:

Irrespective of your retirement decision, you must consider diversifying your investment portfolio, maintaining an emergency fund, and cutting back expenses . Expenses on tangible assets that do not add value are potential liabilities that might not leave you with enough money to retire. 

Spend according to your additional income or reduce income outflow on luxuries like leisure activities, purchasing depreciating assets like automobiles or expensive furniture. Tangible assets decrease the overall income generation capacity of an individual. 

  1. Ensure a seamless transition: 

The transition from earning 1.5 lakhs monthly to a meagre 30,000 (for example) can be disturbing and troublesome. However, the transition should not affect your standard of living or devour most of your emergency funds. While work-related expenses fall, an early retiree might require more money to fund healthcare costs or costs incurred on minimising boredom. 

It is important to note that expenditure on your children’s education or daily household costs remains the same, although your income decreases manifolds. Therefore, your pre-retirement period should involve a lot of research on revenue generation techniques and investment multipliers that will help you retain your pre-retirement lifestyle even after retirement.  

Final Word

Most working professionals want to know about how to retire by the age of 40. Early retirement does not just imply reaching an impressive financial milestone or cutting expenses. For early retirement, consider accumulating sufficient corpus, estimating your living years, preparing for contingencies, looking after your family, and anticipating your health expenditures. 

In addition, experts believe that repaying debt obligations removes your stress and benefits your financial decision making. Lastly, consider hiring a financial advisor for drafting the best possible investment plan based on your goals and risk appetite. 

Frequently Asked Questions

How to get rid of student loans before early retirement?

The primary reason behind the high rate of student loans among retirees is that they are co-signers on loans for their children. Therefore, determine the amount required to clear off debts and look for the tax benefits that will lessen the impact.

What are the tax implications of debt mutual funds for early retirees?

You need to pay tax on your capital gains (long term or short term). Debts and debt-oriented funds held for less than 3 years attract taxation based on your income slab. However, long-term gains (3 years and above) are taxable at 20% with indexation benefits.

Is it possible to retire at the age of 40 risk-free?

The risk factor associated with early retirement depends on your living standard, net annual income, and financial liabilities. Therefore, ensure taking every opportunity to save and earn money if you plan to retire by 40.

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Krishna Deshmukh

Investment Principal
Krishna is an investment professional with a demonstrated history of working in Debt Capital Markets. He has completed his B.E. (Hons) in Computer Science Engineering from BITS Pilani and MBA (Finance) from JBIMS, Mumbai. He is currently working as Investments Principal at Wint Wealth. Previously he worked at Kotak Mahindra Bank at their DCM desk and Northern Arc Capital at their Structured Finance desk.

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