If your grandfather worked for 40 years and father worked for 33 years, you will be working for 25 years. So, if the working life has shrunk over three generations, the life expectancy has increased as well. With the radically changing mindset of young professionals, retiring by the age of 45-50 does not sound astounding. But, there is no doubt in the fact that retiring early is not easy.
In fact, longer the retirement life, more the expenses will eat away into your savings. These are not just routine expenditures such as grocery, utility bills or hospitalization/medicines. Today, individuals have higher retirement aspirations too – they want to travel extensively, take foreign holidays and pursue their hobbies instead of lounging on a recliner watching the world go by. Hence, the retirement savings have to encapsulate these costs also.
However, a sound retirement strategy and good investment choices can make your transition from office to retirement smoother. Here is how:
Chalk down your retirement planning
It is the most critical step towards your early retirement. You need to analyse how much savings you need to sustain your current lifestyle in the retirement period. Accordingly, you may have to change the way you utilise your financial resources. You need to give up spending on ‘wants’ and say no to big expenditures. Perhaps, you may have to sacrifice a few of your existing lifestyle choices and save a bigger portion of your income so that you can save enough corpus for your retirement.
Start saving early
If you start saving early, let’s say as soon as you start earning, you can keep a long-term horizon and a higher risk appetite. You have fewer liabilities, so you can spare more money to invest and grow. You can benefit from the power of compounding and multiply your corpus substantially. Your early working life is the most valuable period in terms of income earning and savings, don’t while them away if you want to retire early.
Cut down/pay off debts
Having too many loans will allow you to save less as a major portion of your income will go towards paying the EMIs of the loans. Also, paying off loans in the retirement years can cause a huge financial burden. So try to take the minimum loans, preferably only home loan. Unless you have a working spouse or supplementary income to fund the EMI in the retirement years, it will pay to pay off the debt before you bid goodbye to work.
Build a right portfolio
It is essential to build a good portfolio if you wish to retire early. For this purpose, you need to choose a right asset mix. The following investment options that you can consider investing in to build a sufficient retirement corpus:
1. Personal Provident Fund (PPF): It is a good investment option when it comes to tax free regular income. It is the long-term debt scheme by the government, which can be opened in post offices or designated banks. Currently, investment in PPF is fetching a return at 7.9 percent p.a.
2. Bank Fixed Deposits: They are the most popular means of investment in India. And, of course the lifeline of the retirees, especially senior citizens. While the interest receivable is taxable, the safety net of regular and risk free returns make them eligible for the inclusion in the portfolio.
3. Mutual Funds: Investing in mutual funds can help you build a huge retirement corpus if you stay invested for long term or at least during the entire working years. You can invest in equity as well as debt instruments through mutual funds and change the asset allocation based on your risk appetite as you near your retirement age.
Investment in equity gives a higher inflation-adjusted return in comparison to other investment instruments as they are usually held for a longer period. You can choose a combination of blue-chip, large-cap or mid-cap funds.
You can even consider investing in debt funds for regular income instead of fixed deposits since the interest on fixed deposits is fully taxable whereas the income from debt funds is taxable at 20% after indexation if held for three or more years.
A simple way to invest in mutual funds is through SIP to spread the volatility risk over the period of investment.
Ideally, you should invest in equity funds in the initial working years, and as you move near your preferred retirement age, you can switch to debt funds.
4. Life insurance plans: No investment other than a life insurance policy can secure your family’s financial security in the eventuality of your unfortunate death. Remember, that since you plan to retire early, you will still have dependents to look after. It is advisable not to take a ULIP or an endowment plan, take a term plan where you can get higher coverage at a lower premium. The premium saved on the higher premium of the former plans can be invested in a mutual fund to get returns.
Take the maximum advantage of tax savings
Tax leaks can erode your retirement corpus. Other than your salary, you also need to pay taxes on property rent, capital gains, etc. So, apart from investing, tax saving instruments, you should also look at all other sources on which you can avail tax deductions and exemptions. For instance, HRA, LTA, car reimbursement, home loan interest, tuition fee of children, etc.
Buy health insurance cover
The average hospitalization cost has increased at 10.7% CAGR since 2004. Paying huge medical bills out of your own pocket after retirement will be a huge financial burden. If you take health insurance coverage at a young age when you are healthy, you can get higher coverage at a lower premium.
Having an early retirement is possible. A little bit of financial discipline and early planning will allow you to spend stress-free golden years, no matter which age you choose to retire at.