Just a decade ago, retirement meant hanging up your boots at age 60. Today, Indians do not hesitate to take a permanent break from work in their late 40s or early 50s.
This shift is being driven for two main reasons: Millennials are embracing the FIRE concept and choosing hobbies instead of simply working until the end of their lives.
The FIRE concept implies opting for economic independence and retiring early. This is because millennials are actively choosing jobs in the private sector, unlike their predecessors, who were mostly in government services where the retirement age was fixed. Starting a business venture or traveling the world has taken center stage and many Indians aspire to retire early to pursue their hobbies with ease.
While retirement planning requires a methodical approach, retiring early requires even more discipline. This is how you can start.
Steps to start planning for early retirement
Early retirement requires planning ahead, 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 a year or two. Each year lost will only increase your burden to build a sizable retirement corpus that can help you navigate through your post-retirement life.
The first step in early planning is to calculate the corpus you would need to live a stress-free retirement life. While inflation is an important consideration, reducing the value of money over time, another lingering concern is that you may not be free of all your responsibilities.
For example, even after you retire, you may need to take on the responsibilities of your children’s higher education and manage your wedding expenses. So your corpus needs to be large enough to absorb the costs you know you’ll have to incur.
Start saving right from Word Go
Savings, one of the pillars of personal finance, should be the mantra to follow to the letter for early retirement. Every penny saved is a penny earned. Therefore, you should try to save every possible penny, and this can be easily done with a few points to remember. For example:
- Travel by public transport
While everyone loves personal mobility, traveling by public transportation can help you save significantly on fuel costs in the long run. Add 20 to 25 years to these savings, and the amount is quite large. You can also look forward to options like taking a shared taxi to save on transportation costs.
- Bring your food to the workplace
By bringing your food to the workplace, you can not only stay healthy but also increase your savings. A good lunch can easily set you back a few hundred rupees. If you have a five-day work culture, eating out even three times can cost you a minimum of INR 300 per meal.
If you save this money, you can save 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 big culprit that is detrimental to your savings. The easy availability of credit and deep discounts can encourage him to make impulse purchases of items he may not need.
Impulse buying can not only make your monthly budget go haywire, it can also land you in a debt trap, which only gets vicious over time. The solution is to refrain from buying on impulse and make a judicious assessment when selecting the products and services you opt for.
- Avoid lifestyle-related loans
An evolution of alternative lenders offering instant loans has made it easier to get loans in a jiffy. All you need to do is fill out an online application form, upload the relevant documents, and the money will be credited to 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’re inviting trouble. Most of the time, these loans have a high interest rate that results in astronomical monthly payments (EMI), which are a big obstacle in your savings journey. The end result is the inability to adequately save for retirement.
Invest in financial instruments that suit your needs
Investing is equally essential to growing your money and building a large retirement body. Start your investment journey together with savings. Ideally, you should start investing as early as possible to harness the power of compounding, which is relevant to building wealth.
At the same time, it is essential to invest in the right instrument and asset class. Since you are short on time, you should actively invest, as a conservative outlook can result in a shortfall. This is where you might consider harnessing the potential of stocks to fight inflation. Simply put, investing in stocks can help you build wealth that can offset the effects of inflation.
There are two ways to invest in stocks: stocks and mutual funds. Both have their own advantages.
That said, capital investments need to be disciplined and over a long period of time. To do so, systematic investment plans (SIPs) in mutual funds are your best option. With SIPs, you can kill two birds with one stone. It will help you save and grow your wealth simultaneously.
Benefits of SIPs:
- SIPs help you instill a disciplined savings habit, which is important for long-term wealth building.
- SIPs help you accumulate more units at a lower price when markets are low. This averages the cost of buying over time.
- You can increase the number of SIPs anytime you want, as you wish, to build a larger corpus.
- SIPs can be started with a small amount starting as low as INR 1000 per month.
Additionally, mutual fund SIPs help you diversify your investments and make your portfolio better equipped to withstand sudden market changes. Suppose you started earning at the age of 25 and want to retire at 50, a monthly SIP of INR 5,000 per month in a fund that offers annualized returns of 10% per annum over a period of 25 years can help you get a corpus of a little over ₹66 lakh.
If you delay your investments for five years, this corpus drops to just over INR 37 lakh. So make sure you start early and harness the power of compounding.
Increase the amount of your SIP with an increase in income
Once you experience an increase in revenue, be sure to increase the number of SIPs as well. This will add to your retirement kitty. Taking the example above, if you continue to invest INR 5,000 per month for 25 years with an expected annual rate of return of 10%, then your corpus would be a little above INR 66 lakh. However, if you increase your SIP by 10% every year, it will be more than INR 1 crore.
Also, as you get closer to your goal, slowly switch from equities to debt to avoid depleting your corpus due to market volatility.
take out 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 coverage will be applicable only up to the time you are employed.
Once you quit your job, the coverage will also cease to exist. Health insurance premiums increase with age, and if you’re looking to buy a health insurance plan between the ages of 40 and 50, the premiums will be quite high. If you develop lifestyle-related illnesses, the health plans available will have various terms and conditions that you will need to adhere to.
Buy health insurance when you’re young
It makes sense to buy health insurance when you are young and healthy. Not only will you demand lower premiums, but you can also get extensive coverage with relaxed terms and conditions. You can also easily get over the waiting period for various ailments as your health is likely to be pink.
Equally essential is reviewing your health insurance policy at different stages of life. For example, when you are single, the coverage amount will not be as high. However, after marriage and a family, he would need a bigger deck. Also, as we age, the body is susceptible to various ailments that can lead to higher costs.
Therefore, it is vital to purchase a health plan with adequate coverage and purchase a separate critical illness policy. Critical illness plans are different from regular health plans and you pay a lump sum at the time of diagnosis of the critical illness(es) as mentioned in the policy.
These ailments result in higher expense 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 that you are truly on track for early retirement.
If you can’t buy a stand-alone critical illness insurance plan, add additional critical illness riders to your basic health insurance policy. Riders are add-ons that will pay a lump sum upon diagnosis of the critical condition listed in the plan.
It is not advisable to be in debt in your retirement years. Doing so will not allow you to live a stress-free retired life. Also, with a break in active income, it is a difficult task to pay off debt. If you use your retirement capital to pay off loans, the same thing can have a detrimental impact on your retirement life and even your relationships.
Therefore, it is vital to keep debt to a minimum and try to pay it off as soon as possible. If you’ve taken out a large loan, be sure to prepay whenever possible. Prepayment will reduce the principal amount and help you close the loan before it becomes effective. Foreclosure on a loan early will help you save significantly on interest and could also free you from debt by the time you retire.
Retiring early requires careful planning and, more importantly, making the right investments. Starting early is key as it helps you make changes midway should the need arise. Seek professional help if needed to ensure you are well and truly on your way to a wonderful retired life.