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Ever envied someone who has retired way too young in their life? Do you wonder how that neighbour of yours retired in their late 30s and quit the corporate rat race forever? They probably had a solid retirement pension plan in place or were financially sound to take care of their investments.
In this day and age, planning for early retirement is one of the best things that one can do. It can extend the second innings of your life and give you plenty of time for post-retirement activities. However, only a handful of us actually able to achieve this feat.
Why retire early?
Early retirement is a gateway to a life that is more relaxed and without any added responsibility or jitteriness that follows one in their everyday work-life. Retirement gives us enough time to live life freely and pursue other activities. From travelling to volunteering for a cause, pursuing a passion or just living a laid-back life with family – these are some of the main reasons why some people chose to retire early. On a different note, retirement is a life event that is inevitable so early or not, retirement must be planned.
The challenge
Even though retiring early is possible and many people go this route, there are quite a few challenges that one may face. Finance, however, remains the chief of all challenges.
Firstly, life expectancy is rising in India and the current statistics show that Indians live for an average of 68.56 years. Traditionally, a person would retire at the age of 58 or 60, which leaves only a decade or so to reach that life expectancy mark. A decade of life without an income is manageable, provided the person has planned well for their future.
Now, what happens when a person decides to retire early? Let’s assume retiring at the age of 35 or 40 is early retirement. It leaves the person with a good 3-4 decades to do whatever they want, however, there is no employment or regular income.
The solution
What should be the course of action if you wish to retire early? Read on to find out if you want to sail through life seamlessly.
1. Know the number you’re chasing
Knowing how much money you need by the time you retire is critical for any plan to work in your favour. It will give you a clearer idea about how much of your current income you need to replace. You can use a pension plan calculator to calculate your retirement corpus.
The general rule is to replace around 80% of pre-retirement income.
Let’s take a look at the following example:
Suppose A is 25 years old, earns around Rs 50,000 per month and has monthly expenses of Rs 25,000. If A wants to retire at the age of 45 and maintain the same lifestyle, he would need to invest Rs 24,886 every month. That’s 50% of their income. The numbers have been calculated by keeping the inflation rate at 7% per annum and an expected rate of return of 10% per annum on monthly investments.
So, if you plan to retire early, make sure you know the retirement corpus you would need.
2. It’s time to start saving
If you’re serious about retiring early, you need to get serious about saving. Saving 50% of your income is hard, so it’s time to cut down on expenses.
Channel the expenses you’re cutting into savings. Start with significant expenses such as rent, mortgages, car loan and such. Try and reduce expenses on these to ensure you can save a lot more than you are doing right now. After this, try and cut down recurring expenses to save a bit more for your retirement investment.
3. Invest in a retirement pension plan
A retirement pension plan comes into picture for numerous reasons including helping you retire early. Many insurers provide various retirement plans that pay a regular pension after you retire. Insurers like Future Generali offer retirement pension plans that you can start from as early as 20-years-old with a minimum return of 101% on all premium paid at maturity. You even get tax benefits under Section 80CCC.
Investing in a pension plan can help you achieve your early retirement goals with much ease. Also, the sooner you start investing in a retirement plan, the more you can save by the time you retire.
4. Know the power of compounding
The earlier you start investing for retirement, the more time your money will get to grow. Even in small amounts, the longer you save, the more it will be by the time you retire. The idea here is to invest on a regular basis and then keep reinvesting whatever returns you get on your investments. It will help build a sizable portfolio and your earnings will directly contribute to getting more returns.
Different people have different ideas about retirement. It doesn’t matter when you want to retire – you would need to have a retirement corpus if you wish to sustain your current lifestyle. The only way to achieve it is by planning your retirement as early as possible. Start investing, buy a retirement pension plan, and reap the benefits of compounding from early on.
