In today’s fast paced world, more and more people are living longer and planning for early retirement which makes it more imperative than ever to save money so that we can live our retirement years to the maximum. Now the question of how to retire early is gaining importance and at what financial level, we can afford to retire early. Thus, we need to consider all the factors and challenges that we may face in our early retirement years.
In an era of economic uncertainty and volatility, financial needs of people vary a lot depending upon the place where they stay and their standard of living. In metro cities—like Mumbai, Delhi, Kolkata, Chennai and Bengaluru—the financial need of an individual will be too high to maintain the same standard of living after the retirement compared to non-metro cities. The essential factor for the early retirement is that we must have sufficient financial funds to sustain the same standard of living after retirement.
With the trend of westernisation coming in, the culture of joint family is vanishing. Now people prefer independence. They also have to stay away from their families due to their job being in a different city from the place where their parents stay. Hence, young and working people have to develop a corpus which lasts through their retirement without seeking financial help from their families. Accumulating corpus for an early retirement is not an easy task and only a few people—who have the discipline of investing and can plan systematically—would be able to achieve their retirement goals.
Key points to be kept in mind for early retirement
Inflation: The biggest obstacle for an early retirement is the rising inflation rate. Inflation is one the important factors to be considered for early retirement planning because what we get today at a particular price will not be available at the same price after 20-25 years. Due to inflation, the prices of goods, property, medicine, etc are increasing at a high rate. Hence, inflation has to be taken into consideration while planning for retirement.
Let’s assume that present monthly expense of an individual is Rs. 15,000 per month in a non-metro city to maintain a family of two people. The annual inflation rate is at 5%. This implies that we will need around Rs. 35,000 per month after 30 years to maintain the same standard of living. Further this means, we should have a corpus of at least Rs. 4 million to get an interest of Rs. 27,000 per month at the interest rate of 8% per annum. Remember, these are the most probable figures and it will depend upon our present standard of living along with other uncertainties.
Health care: The physical fitness of an individual will also play a vital role in determining early retirement. The cost of medical treatment, hospitalisation charges, routine doctor’s visit and medicines continue to rise at a fast pace. Health insurance premiums also are also rising as insurance companies have to raise rates to remain viable. Hence, we should ensure that we will have an adequate health insurance cover with a reliable heath insurer during our pre- and post-retirement life.
Education & marriage expenses: Education costs/fees are also rising these days. While planning for our retirement, we also need to take into consideration the present cost of school fees, higher education fees and marriage expenses of our children. This is essential so that we have sufficient funds to give our children good education and meet their marriage costs. These costs have to be calculated with the rising inflation rate.
Real estate: Prices of property are appreciating all over the country. If we are planning for bigger house may be after 20 years, we need to arrange funds for the same accordingly at that period. It is here that proper financial planning and systematic investments come into play.
Savings for early retirement: The key determinant of successful early retirement planning is the aggressive savings rate while one is working. Higher the percentage of savings, better are the chances to meet our early retirement goal.
Strategies for early retirement
Early retirement policies
Build a budget: Budgeting is important and the first step for accumulating funds for retirement. The budget must include our income, expenses and how much we save. We must then take steps on how we can reduce our monthly expenses which would help us to enhance our savings ratio.
Keep track on income & expenses: After making a budget, to enhance your savings, follow this simple rule: Income – Investments = Expenses; instead of Income – Expenses = Investments.
Start saving early: We should start saving early with whatever amount is possible for us—because the power of compounding can have a drastic effect on our savings. At the start of our career, when monthly income levels are low, it will be very difficult to achieve a significant savings percentage.
But when we gain experience, our monthly income levels would go up and we would be able to increase our savings percentage rate. Hence, we should start investing early to meet our early retirement goals.
Create a financial plan: We also need to have a proper financial plan. This plan should include what are our present monthly expenses and how much we would need after our post retirement. The plan should include our assets and liabilities. It should also mention the inflation adjusted cost of education fees of our children.
If we are planning to buy a house—say after next 20 years, the plan should include the same. The financial plan should also mention our financial needs. All these expenses should be taken into consideration with inflation-adjusted rate so have we have an adequate corpus at retirement.
Review the financial plan: You also need to review your financial plan and investments on regular basis. This is essential because our priority and goals change with the passage of time.
Retire from debts: It is crucial for us to ensure that when our retirement period arrives, we are debt free. After retirement, our employment/salary income will be zero hence retirement from debt is important.
During retirement, we need to ensure that our income stream or pension is in pace with inflation. We don’t need all our funds at once when we retire but we should ensure that we have an adequate flow of income available to us for 10, 15 or 20 years till the time we and our spouse are alive. Therefore, a proper financial plan, regular investment and a constant review of our investments is crucial to achieve our desired financial goal.
The author is a certified financial planner and the founder of nextstep Financial Planners.
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