As early as a decade ago, retirement meant hanging up your boots at 60. Today Indians are not shying away from taking a permanent break from work in their late 40s or early 50s.
This change is being led by two main reasons: millennials embracing the FIRE concept and choosing hobbies over simply working till the end of their life.
The FIRE concept implies choosing financial independence and retiring early. This is fueled by the millennials actively choosing jobs in the private sector, unlike their predecessors who were mostly engaged in government services where the retirement age was fixed. Starting an entrepreneurial venture or traveling around the world have taken center stage and many Indians are aiming to retire early to pursue their hobbies with ease.
While retirement planning needs a methodical approach, an early retirement calls for being even more disciplined. Here’s how you can get started.
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Steps To Start Planning An Early Retirement
An early retirement calls for early planning, perhaps from day one when you start earning. Unlike others, who plan to retire late, you don’t have the flexibility to postpone your planning even by a year or two. Every year lost will only add to your burden to build a sizable retirement corpus that can help you sail through your post-retired life.
The first step to early planning is to calculate the corpus you would need to live a stress-free retired life. While inflation is an important consideration, as it reduces the value of money with time, another lingering concern is that you might not be free of all your responsibilities.
For example, even after retiring, you might need to shoulder the responsibilities of your children’s higher education and manage their wedding expenses. Hence, your corpus should be large enough to absorb costs that you know you may have to incur.
Start Saving Right From the Word Go
Savings, one of the cornerstones of personal finance, should be the mantra to be followed to the T for early retirement. Every penny saved is a penny earned. So, you must try to save every penny possible, and this can be done with ease with a few points to remember. Forinstance:
- Commute Via Public Transportation
While everyone likes personal mobility, commuting via public transportation can help you save significantly on fuel expenditure in the long run. Add 20 to 25 years to these savings, and the amount will be quite large. You can also look forward to options like hailing a shared cab to save on transportation costs.
- Bring Your Food to Workplace
By carrying your food to the workplace, you can not only stay healthy but also augment savings. A hearty lunch can easily cost you a few hundred rupees. If you have a five-day working culture, eating out even thrice can cost you a minimum of INR 300 per meal.
If this money is saved, you can make savings of at least ₹1,200 in a month. You can do the math yourself to find out how much it will save you over the years.
This is a major culprit that’s detrimental to your savings. Easy availability of credit and steep discounts may encourage you to make impulse purchases of items you may not need.
Impulse buying can not only make your monthly budget go haywire but can also lead you towards a debt trap, which only turns vicious with time. The solution is to refrain from impulse buying and make a judicious assessment when selecting products and services that you opt for.
- Avoid Lifestyle-Related Loans
An evolution of alternate lenders offering instant loans has made it easy to avail loans in a jiffy. All you need to do is fill out an online application form, upload relevant documents, and the money is credited into your account within a few hours.
While such loans are a boon in times of emergency, if you opt for them often for frivolous needs, then you are inviting trouble. More often than not, these loans have a high interest rate resulting in astronomical monthly installations (EMIs), which are a big roadblock in your savings journey. The end result is the failure to save adequately for retirement.
Invest in Financial Instruments That Suit Your Needs
Investment is equally essential for growing your money and building a large retirement corpus. Start your investment journey in tandem with savings. Ideally, you must start investing as early as possible to harness the power of compounding, which is pertinent for wealth creation.
At the same time, it’s vital to invest in a suitable instrument and asset class. Since you are short on time, you need to be actively invested as a conservative outlook may result in a shortfall. This is where you could consider harnessing the inflation-beating potential of equities. To simply put, investment in equities can help you build wealth that can counter the effects of inflation.
There are two ways through which you can invest in equities—stocks and mutual funds. Both of them have their own advantages.
Having said that, equity investments must be disciplined and for a long time. For doing so, systematic investment plans (SIPs) in mutual funds are your best bet. With SIPs, you can hit two birds with one stone. It will help you save and grow your wealth simultaneously.
Benefits of SIPs:
- SIPs help you inculcate a disciplined savings habit, which is important for long-term wealth creation.
- SIPs help you accumulate more units at a lower price when markets are down. This averages out the cost of buying over time.
- You can increase the SIP amount any time you want, as desired, to build a bigger corpus.
- SIPs can be started with a small amount, from as little as INR 1000 per month.
Also, mutual fund SIPs help you diversify your investments and make your portfolio better equipped to weather sudden market swings. Let’s suppose you have started earning at the age of 25 and wish to retire by 50, a monthly SIP of INR 5,000 per month in a fund offering annualized returns of 10% per annum for a period of 25 years can help you garner a corpus of a little over ₹66 lakhs.
If you delay your investments by five years, this corpus comes down to a little over INR 37 lakh. So, make sure to start early and gain from the power of compounding.
Increase Your SIP Amount with a Rise in Income
Once you experience a rise in income, make sure to increase the SIP amount too. This will add to your retirement kitty. Taking the previous example, if you continue to invest INR 5,000 per month for 25 years with a 10% expected annual rate of return, then your corpus would be a little above INR 66 lakh. However, if you increase your SIP by 10% every year, it will be over INR 1 crore.
Also, as you near your goal, slowly shift from equities to debt to protect the corpus from depleting due to market volatility.
Take Health Insurance
Health insurance is another essential consideration for retiring early. Health care costs are rising at an alarming rate and a medical contingency can wipe out your savings in no time. Even if you are covered by your employer, the cover will be applicable only until the time you are employed.
Once you quit your job, the cover too will cease to exist. Health insurance premiums rise with age, and if you are looking to buy a health insurance plan in your late 40s and early 50s, the premiums will be pretty high. If you develop lifestyle diseases, the available health plans will have several terms and conditions that you may need to comply with.
Buy Health Insurance When You Are Young
It makes sense to buy health insurance when you are young and healthy. Not only will it command lower premiums, but you can also get extensive coverage at relaxed terms and conditions. You can also easily get over the waiting period for various ailments as you are likely to be in the pink of your health.
Equally essential is to review your health insurance policy at different life stages. For instance, when you are single, the coverage amount will not be that high. However, post marriage and a family, you would need a bigger cover. Also, as you age, the body is susceptible to various ailments that may entail higher costs.
So, it’s vital to buy a health plan with adequate coverage and buy a standalone critical illness policy. Critical illness plans are different from regular health plans and you pay a lump sum upon diagnosis of critical ailment(s) as mentioned in the policy.
These ailments result in a higher expenditure and a regular health plan may not be adequate to cover the high cost. The lump sum received from a critical illness policy ensures that your savings and investments are not affected, and you are well and truly on your path to early retirement.
If you are not able to buy a standalone critical illness insurance plan, add critical illness riders to your base health insurance policy. Riders are add-ons that will pay a lump sum upon diagnosis of the critical ailment mentioned in the plan.
Carrying debt in your retirement years is not advisable. Doing so will not allow you to live a stress-free retired life. Also, with a break in active income, it’s a tall order to repay debt. If you use your retirement corpus to pay off loans, the same can have a detrimental impact on your retired life and even relationships, for that matter.
Hence, it’s vital to keep debt to the minimum and try to pay them as early as possible. If you have taken a big-ticket loan, make sure to pre-pay whenever possible. Pre-paying will bring down the principal amount and help you close the loan earlier than its tenure. If you foreclose a loan before its term, it will help you make significant savings on interest and could also make you debt free by the time you retire.
Retiring early commands meticulous planning and, more importantly, making the right investments. Starting early is the key as it helps you make changes mid-way should the need arise. Seek help from a professional if needed to ensure you are well and truly on your path to having a wonderful retired life.