For the regular retiree at 60, there isn’t much to choose. They just ‘have to’ call it a day at 60. They already know the deadline and need to save as much as possible (or at least enough) to retire at 60.

But for those who plan to retire early, there are some extremely difficult decisions to make: when exactly to retire, and more importantly, if they have saved enough to hang up their boots early?

As is self-evident, the idea of ‘enough’ is quite central to the concept of early retirement. And being able to calculate this ‘enough’ with some degree of accuracy is critical. 

A wrong assessment of how much you would need may mean a poorly timed retirement. The decision to opt for early retirement may turn out to be disastrous if one runs out of money in the later years of life. Remember, early retirees are potentially looking at 30-40 years of spending without working, unlike regular retirees who would face around 20 or so years of retirement life.

Without getting into complicated maths and possibly scaring the few that are interested in an early retirement, let us understand the calculation in an simpler language.

So, what are the factors to be considered while arriving at an amount that would be sufficient for your retirement?

Your regular annual expenses and spending patterns must be analysed. Remember, it’s not a theoretical assessment of how much you will spend each year. No one spends the same amount each year, right?

Let’s say you plan to retire at 45. In the initial 10-15 years, you are likely to be more active and spend more on leisure, travel, among other things. But beyond 60, your health-related expenses will increase, while those under other heads (such as frequent travel) will come down. So, your spending pattern will be different in each decade of retirement.

This has to be considered while assessing your basic annual income needs in retirement. So, the first part of calculating what is ‘enough’ is that the amount should be sufficient for regular expenses (increasing with inflation) for X* years of your remaining life after early retirement. (*If you plan to retire at 45 and assuming a life expectancy of 85, then X is 40 = 85-45)

But regular expenses aren’t the only considerations. What about other big-ticket expenditures such as those involving the replacement of your vehicle every 10 years? Or, a major, unexpected house repair? You also need to set aside an amount for such unpredictable, but probable expenses in your calculations for arriving at the final figure.

Major medical expenses that (unluckily) aren’t covered under your health insurance need to be kept in mind. You never know when insurance companies might add unfair technical clauses in the future and may not pay (in some cases) your hospital bills. To cover this risk, it’s better to have a separate health contingency fund as well.

You don’t want to derail your retirement plan because of huge medical bills later on in life. Do you?

After retiring early, you may want to keep yourself busy and earn a part-time income as well. Doing so is perfectly fine. But if you assume this part-time income will take care of some expenses for the rest of your life, then you may be mistaken . Remember, part-time income is exactly what it is called – part-time. It can therefore stop at any time. So, this extrapolation of part-time income till eternity should be avoided in the later years of life.

There are a few other points to ponder over. But those mentioned above should be the starting point for you to plan better. All those dreamy plans of having one large fixed deposit and living with interest income happily ever after need to be set aside.

If your idea of ‘enough’ doesn’t cover the above points, then it’s probably not a good idea to retire early.

If you are serious about achieving FIRE (financial independence and retiring early), then you really need to figure out whether you have enough to retire early.

Avoid relying solely on thumb rules such as four percent withdrawal, savings of 25 times annual expenses, etc. In your hurry to quit the mad rat race, do not make the mistake of underestimating the answer to ‘how much is enough to retire early?’ Your financial life will then be miserable when you get old.