Since the beginning of my practice as a ‘fee only financial planner’, I meet & get to interact with lot of people about their journey in finance. I like to help them in setting their goals & prioritize.
One goal many of them often quote is, ‘early retirement’!
I have observed that, people from their mid 30s & mid 40s are eager to take early retirement. When planning for their personal finance, it often becomes a task to cater to & to justify this goal for them.
Why increasing no of people are looking to retire early?
- Stiff competition-
Today, for one post there are thousands of applications that come in. If you say ‘NO’ to any work, then you can get easily replaced by others.
- Work environment-
We all are human beings with our own sets of emotions like self- respect, empathy, belongingness, loyalty. When these emotions & our skills & competency don’t get nurtured, we feel ‘left-out’. Work environment has to be inclusive & encouraging always. If not, then it triggers a person to change job.
- Ever evolving technologies & work methods-
Innovation is the key! So, work methods & technologies keep on changing every now & then. A person has to upgrade & update him/herself to be in the flow. If one can-not, then he starts losing good opportunities & pay hikes.
- Different avenues to earn money-
Extended work hours, work pressures, competitions, targets make people give lesser attention & time to themselves & family. We all have some or the other skills or talents. Like-minded people, thus come together & start building something more meaningful together through start-ups.
Some start on their own parallelly.
When such above reasons make people to take an early retirement & lead a different, quality life, it adds many aspects to think & consider about.
Let’s look at them-
- Increased post retirement life:
With early retirement, one is going to have longer post retirement life. We all know, that ‘life expectancy’ is higher now. So, if one wishes to retire by age 50, & his life expectancy is 80, then he will have 30 years post retirement.
Instead of typical retirement age 60, as he wishes to opt for age 50 for retirement, he is adding 10 years to his post retirement life.
- Retirement corpus:
Retirement corpus is the amount which helps us to survive, pay off our monthly bills & maintain our standard of living throughout post our retirement.
One is expected to accumulate the corpus during his earning years with the help of disciplined investments. Early retirement cuts down earning years & so one needs to increase the amount of investment during earning years to reach the goal.
Let’s take the hypothetical example of Mr A & Mr B. Mr A wishes to retire early, whereas Mr B will go for regular retirement age.
They are assumed to start investing at age 35. Retirement corpus needed for both of them is Rs 1 Cr. Mr A wishes to retire by age 50 & Mr B at age 60. Let’s see how much they need to invest monthly to achieve the retirement corpus
Following table will explain the same-
|Particulars||Person A||Person B|
|Investment start age||35||35|
|Rate of return||12%||12%|
As you can see, to reach retirement corpus of Rs 1 Cr, Mr A needs to invest Rs 20,000 per month for a period of 15 years whereas, Mr B, needs to invest Rs 5,500 for a period of 25 years.
- Loans & liabilities:
Every one of us has some or the other responsibility, loans or liabilities to look after. If these come with longer tenure than that of our earning years, then that should be considered well.
Earning years is the only period when one can pay off the bills & can invest for future.
- Passive income:
Early retirement enables a person to have a break from full time work. Retiring at early age has its advantage as a person can use his energy & time to pursue something of his choice & interest.
How can one plan for early retirement?
- Decide Early:
At the onset of your career, take some time out to think about retirement. Many thinks of it as too early to consider, but if you really have other interests which you want to pursue & make money from, then you can consider early retirement but deicide on this goal soon in the initial years of your career.
If you are in the industry like ‘Information technology’ where everyday new things & technologies come up, then it may become difficult for you to keep a pace with it. This can lead you to decide on early retirement.
- Set goals:
If early retirement is your prime goal, then set other goals related to family & children on priority.
Chase only those goals which are important. Decide between your needs & wants.
- Start investing early:
Early retirement means lesser earning years which in turn means lesser investment period. To be ‘financially independent’ post retirement, you need to have sufficient corpus. So, you need to calculate your retirement corpus requirement & start investing early.
- Choose investment options wisely:
For your investment towards the goal of early retirement, you need to choose the investment product wisely. There are investment options like Public provident fund, mutual funds, employee provident fund, national pension scheme which are suitable for long term goals like retirement.
But, for e.g if you are going to retire by age 50, & you are heavily investing in option like ‘national pension scheme’ which has a lock in period till age 60, then it’s a mismatch.
Choose your investment option wisely.
- Have sufficient emergency fund:
If you wish to retire early, then you should provide for a contingency fund equivalent to minimum 2 years of your monthly expenses. If you are a single earning member of the family & wishes to retire early, then its highly required for you to accumulate that much amount of emergency corpus.
This will enable you & family to face any emergency easily & get some time in hand to seek alternative for the situation.
- Have suitable & adequate life & health insurance cover:
Every one of us should have sufficient health & life insurance cover. If your goal is of early retirement, then you should have them with you. Along with these insurance policies, you also should have a provision to pay off their respective premiums post retirement. While calculating retirement corpus, you should consider this.
- Don’t apply for long tenure loans:
Loans like housing loans have long tenure to pay. While applying for home loans, you should consider this if your goal is of early retirement. You should be ideally free from all the loans & liabilities once you retire.
- Be mindful in spending:
Limited earning years & many things to achieve along with retirement corpus. In this, you must be mindful while spending. You should be cautious while buying anything, if not needed then please stay away from it.
- Review your investments:
Investments which you have made for your retirement need a regular review. Today there is no alternative for ‘retirement corpus’ as we still do not have any government support schemes which can sufficiently pay for our expenses post retirement.
Review will enable you to make required changes in your portfolio.
- Be ready with your line of activity post retirement:
When you retire early, you have enough time & energy to follow your passion & hobbies. They can earn you money as well. But, for this, you should eb well prepared before retiring. It will so keep you engage in meaningful activities & can give you ‘happy income’.
We get to live life at once! We can have multidimensions to our career & life too but please be thoughtful to enjoy them at the most!