Financial freedom and early retirement require different saving approaches

I think you know it. The overly demanding work-life that leaves people drained out is one of the major factors. Also, many want to pursue something other than just a nine-to-five job. It may be some long unfulfilled wish or something else.

Saving enough to not work

Collectively, Financial Independence (FI) and Early Retirement (RE) are referred to as FIRE-Financial Independence Retire Early. You have to save a large amount of money as soon as you can by using this FIRE Acceleration Formula.

But there is a subtle difference between financial independence and early retirement that gets lost in a normal conversation.

Financial Independence: It simply means that you have enough savings (or passive income-generating assets) and you do not have to depend on a regular full-time job to take care of your expenses. Or, you can say that you have enough money and don’t have to work for money again.

How is this FI different from ER?

Early Retirement: This means that you have sufficient money to retire and you do actually retire.

So FI is about having enough money to have the option to retire early. While ER is about using that option and actually retiring.

Even if you are Financially Independent (FI), you may continue working if you want. Or, you may decide to become more selective about what you work on, as money is not the criteria and you are no longer dependent on salary income. On the other hand, when you decide to Retire Early (ER), you are consciously quitting earning engagements and may spend time doing non-monetary activities.

Obviously,  early retirement requires a much larger corpus than what it would if you opt to be financially independent.

There can be different versions of FI. For example, someone who has supposedly achieved FI may go for a sabbatical for a few years and then re-join the workforce. Or, she may decide to become involved in some part-time engagement and continue earning. At the other end is retiring permanently.

The math of financial freedom

Coming back to why people work – they have bills to pay and their family’s financial responsibilities to fulfil. And having a regular salary offers security to sustain a certain lifestyle. For many, it gives a sense of purpose too. It is for this reason that going for FI or RE is not for everyone.

If you understand the math of saving for financial freedom, you will know that it’s not just about cutting expenses, but also about saving a lot more than what most people can do.

So, while many would want to retire early and the prospect of pushing the retirement age lower is indeed glamorous, it’s also a must to correctly evaluate your finances and infer whether it’s viable for you or not.

If you are interested in the concept of Financial Independence and want to know whether it’s for you, then this is what you can do:

- First, find out how much you need to save for a regular retirement at 60 or 65.

- Also find out how much you need for other non-negotiable goals such as your child’s higher education, house purchase (or home loan repayment) and saving for emergencies.

- Now find out how much is required in savings to retire early, let’s say at 50 or 55 – you would require much more than what you would after regular retirement.

You already know what your savings capability is. So, once you have the above three figures with you, you will know whether you can afford to go for early retirement or not.

At least, you will start to think on the correct lines about retiring early.

(The writer is the founder of StableInvestor.com)