Steps to Plan for Retirement Early – Forbes Advisor INDIA
Ten years ago, retirement meant hanging up your boots at 60. Today, Indians are not shy about taking a permanent break from work in their late 40s or early 50s.
This shift is driven by two main reasons: Millennials embracing the FIRE concept and choosing hobbies over just working until the end of their lives.
The FIRE concept implies the choice of financial independence and early retirement. This is fueled by the fact that millennials actively choose jobs in the private sector, unlike their predecessors who were mainly engaged in government services where the retirement age was set. Starting a business or traveling the world have taken center stage and many Indians are considering early retirement to pursue their hobbies with ease.
While retirement planning requires a methodical approach, retiring early requires even more discipline. Here’s how you can get started.
Steps to start planning for early retirement
Retiring early requires planning early, perhaps from the first day you start earning money. Unlike others, who plan to retire late, you don’t have the flexibility to postpone your planning even for a year or two. Each lost year will only add to your burden of building a significant retirement corpus that can help you navigate your way through life after retirement.
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 because it reduces the value of money over time, another lingering concern is that you might not be free from all of your responsibilities.
For example, even after you retire, you may have to take on the responsibilities of your children’s college education and manage the expenses related to their marriage. Therefore, your corpus should be large enough to absorb the costs you know you may need to incur.
Start saving right from the start
Saving, one of the cornerstones of personal finance, should be the mantra to follow until the T of early retirement. Every penny saved is a penny earned. So, you should try to save every penny you can, and it can be done easily with a few things to remember. For example:
- Getting around by public transport
While everyone loves personal mobility, commuting by public transport can help you save significantly on fuel expenses in the long run. Add 20 to 25 years to these savings, and the amount will be quite significant. You can also expect options like hailing a shared taxi to save on transportation costs.
- Bring your food to work
By transporting your food to the workplace, you can not only stay healthy, but also increase your savings. A hearty lunch can easily cost you a few hundred rupees. If you have a five-day work culture, eating out even three times can cost you at least INR 300 per meal.
If this money is saved, 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 major culprit that hurts your savings. The easy availability of credit and deep discounts can encourage you to make impulse purchases of items you may not need.
Impulse buying can not only throw your monthly budget out of whack, but can also lead you into a debt trap, which only gets vicious over time. The solution is to refrain from impulse buying and to make a judicious evaluation when selecting the products and services for which you opt.
- Avoid lifestyle loans
An evolution of alternative lenders offering instant loans has made it easier to get loans in a jiffy. All you have to do is fill an online application form, upload relevant documents and the money is credited to your account within few hours.
Although these loans are a godsend in an emergency, if you often take them out for frivolous needs, you are getting yourself into trouble. More often than not, these loans have a high interest rate resulting in astronomical monthly payments (EMI), which are a major obstacle to your savings journey. The end result is the inability to save enough for retirement.
Invest in financial instruments that meet your needs
Investment is also essential to grow your money and build a large retirement corpus. Start your investment journey in tandem with savings. Ideally, you should start investing as early as possible to harness the power of compounding, which is relevant to wealth building.
At the same time, it is essential to invest in an appropriate instrument and asset class. Since you are short on time, you need to invest actively, as a conservative outlook can lead to a shortfall. This is where you might consider tapping into the inflation-fighting potential of stocks. Simply put, investing in stocks can help you build wealth that can counter the effects of inflation.
There are two ways in which you can invest in stocks— stocks and mutual funds. Both have their own advantages.
That said, equity investments should be disciplined and for a long time. To do this, systematic investment plans (SIPs) in mutual funds are your best bet. With SIPs, you can kill two birds with one stone. It will help you save and grow your wealth simultaneously.
Advantages of SIPs:
- SIPs help you instill a disciplined saving habit, which is important for long-term wealth building.
- SIPs help you rack up more units at a lower price when the markets are down. This averages the purchase cost over time.
- You can increase the SIP amount at any time as you wish to build a larger corpus.
- SIPs can be started with a small amount, starting from INR 1000 per month.
Plus, mutual fund SIPs help you diversify your investments and better equip your portfolio to deal with sudden market fluctuations. Suppose you started earning money at age 25 and want to retire at age 50, a monthly SIP of INR 5,000 per month into a fund offering annualized returns of 10% per annum for a period of 25 years can help you garner a corpus of just over ₹66 lakh.
If you delay your investments for five years, this corpus amounts to just over INR 37 lakh. So be sure to start early and harness the power of compounding.
Increase your SIP amount with increased income
Once you see an increase in your income, be sure to increase the SIP amount as well. This will add to your retirement kitty. Continuing with the previous example, 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 will be slightly above INR 66 lakh. However, if you increase your SIP by 10% every year, it will exceed INR 1 crore.
Also, as you approach your goal, slowly transition from stocks to debt to protect the corpus from depletion due to market volatility.
Get health insurance
Health insurance is another key consideration for early retirement. 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, coverage will only apply until you are employed.
Once you quit your job, coverage will also cease to exist. Health insurance premiums increase with age, and if you are looking to purchase health insurance in your late 40s and early 50s, the premiums will be quite high. If you develop lifestyle-related illnesses, the health plans available will have several terms and conditions that you may need to adhere to.
Buy health insurance when you’re young
It makes sense to get health insurance when you’re young and healthy. Not only will this lead to lower premiums, but you can also benefit from extended coverage on more flexible terms. You can also easily overcome the waiting period for various ailments as you are likely to be in the pink of your health.
It is equally essential to review your health insurance policy at different stages of life. For example, when you are single, the coverage amount will not be so high. However, after marriage and a family, you would need more coverage. Also, as you age, the body is susceptible to various ailments that can lead to higher costs.
It is therefore essential to buy a health plan with adequate coverage and to buy a stand-alone critical illness insurance policy. Critical illness insurance plans are different from regular health insurance plans and you pay a lump sum upon diagnosis of critical condition(s) as stated in the policy.
These conditions entail higher expenses and a regular health plan may not be enough to cover the high cost. The lump sum received from a critical illness insurance policy ensures that your savings and investments are not affected and you are well and truly on your way to early retirement.
If you are unable to purchase a stand-alone critical illness insurance plan, add critical illness riders to your basic health insurance policy. Runners are add-ons that will pay a lump sum upon diagnosis of the critical illness mentioned in the plan.
It is not advisable to go into debt during your retirement years. This will not allow you to live a stress-free retirement life. Moreover, with a break in active income, it is difficult to pay off debt. If you use your retirement corpus to pay off loans, it can negatively impact your retirement life and even your relationships, for that matter.
Therefore, it is essential to minimize debts and try to pay them off as soon as possible. If you have taken out a large loan, be sure to pay in advance whenever possible. Early repayment will reduce the principal amount and help you close the loan before its term. If you cancel a loan before its term, it will help you save a lot of interest and could also free you from your debts when you retire.
Retiring early requires careful planning and, more importantly, making the right investments. Starting early is key as it helps you to make changes halfway through if the need arises. Seek professional help if needed to make sure you’re well on your way to a wonderful retirement life.