Steps to planning for retirement early – Forbes Advisor INDIA
Ten years ago, retirement meant hanging up at 60. Today Indians do not hesitate to take a permanent break from work in their late forties or early fifties.
This change is driven by two main reasons: Millennials embrace the FIRE concept and choose hobbies over just working until the end of their lives.
The FIRE concept involves 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 primarily engaged in government services where the retirement age was set. Starting a business or traveling the world has taken center stage and many Indians are considering early retirement to pursue their hobbies with ease.
While retirement planning requires a methodical approach, early retirement requires even more discipline. Here is how you can get started.
Steps to start planning for early retirement
Early retirement requires early planning, perhaps from the first day you start making money. Unlike others, who plan to retire late, you don’t have the option to postpone your planning for even a year or two. Each lost year will only add to your burden to build a significant retirement body that can get you through your post-retirement life.
The first step in early planning is to calculate the body of work you would need to live a stress-free retirement life. While inflation is a big factor because it reduces the value of money over time, another lingering concern is that you might not be free from all your responsibilities.
For example, even after you retire, you may need to take responsibility for your children’s higher education and manage their wedding expenses. Therefore, your corpus must be large enough to absorb the costs that you know you will incur.
Start saving right from the start
Saving, one of the cornerstones of personal finance, should be the mantra to follow until the T for early retirement. Every penny saved is a penny earned. So, you have to try to save every penny possible, and it can be done easily with a few things to remember. For example:
- Getting around by public transport
While everyone enjoys personal mobility, public transportation can help you save significantly on fuel costs in the long run. Add 20 to 25 years to that saving, and the amount will be quite large. You can also expect options like hailing a shared taxi to save on transportation costs.
- Bring your food to the workplace
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 that money is saved, you can save at least 1,200 per month. You can do the math yourself to find out how much it will save you over the years.
This is a major culprit which is detrimental to your savings. Easy access to credit and large discounts can encourage you to make impulse purchases of items you may not need.
Impulse buying can not only derail your monthly budget, but can also lead you into a debt trap, which only becomes 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 are opting.
- Avoid lifestyle loans
An evolution of alternative lenders offering instant loans has made it easy to obtain loans in a jiffy. All you have to do is fill out an online application form, upload the relevant documents and the money is credited to your account within hours.
While such loans are a boon in an emergency, if you often opt for them for frivolous needs, you are inviting trouble. More often than not, these loans have a high interest rate, resulting in astronomical monthly payments (EMI), which is a major obstacle in your savings journey. The end result is the inability to save enough for retirement.
Invest in financial instruments adapted to your needs
Investing is also essential for growing your money and building a large retirement body. 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 for building wealth.
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 cautious 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.
You can invest in stocks in two ways: stocks and mutual funds. Both have their own advantages.
That said, investments in stocks must be disciplined and sustainable. To do this, systematic investment plans (SIP) in mutual funds are your best choice. With SIPs, you can kill two birds with one stone. It will help you save and grow your wealth at the same time.
Advantages of SIPs:
- SIPs help you instill a disciplined saving habit, which is important for long-term wealth building.
- SIPs help you accumulate more units at a lower price when the markets are down. This averages the cost of purchase 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 at INR 1000 per month.
Plus, mutual fund SIPs help you diversify your investments and better prepare your portfolio to deal with sudden market swings. Suppose you started making money at age 25 and want to retire at age 50, a monthly SIP of INR 5,000 per month in a fund offering annualized returns of 10% per year for a period of 25 years can help you collect a corpus of just over ₹ 66 lakh.
If you delay your investments for five years, this corpus comes to just over 37 lakh INR. So, be sure to start early and take advantage of the power of the composition.
Increase your SIP amount with an increase in income
Once you see an increase in your income, be sure to increase the amount of SIP as well. This will add to your retirement fund. Taking the previous example, if you continue to invest 5,000 INR per month for 25 years with an expected annual rate of return of 10%, then your corpus would be slightly over 66 lakh INR. However, if you increase your SIP by 10% every year, it will exceed INR 1 crore.
Also, as you get closer to your goal, slowly switch from stocks to debt to prevent the corpus from becoming depleted due to market volatility.
Take out health insurance
Health insurance is another essential 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 the time 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 available health plans will have several terms and conditions that you may need to adhere to.
Get health insurance when you’re young
It makes sense to purchase health insurance when you are young and healthy. Not only will this result in lower premiums, but you will also be able to get extended coverage on relaxed terms and conditions. You can also easily overcome the waiting period for various ailments as you are likely to be in the rosy 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 amount of coverage will not be that high. However, after marriage and a family, you would need more coverage. In addition, as we age, the body is susceptible to various ailments which can result in higher costs.
It is therefore essential to purchase a health insurance plan with adequate coverage and to purchase a stand-alone critical illness insurance policy. Critical illness insurance plans are different from regular health insurance plans and you pay a lump sum when you are diagnosed with one or more critical illnesses as mentioned in the policy.
These illnesses result in 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 that you are indeed on the road 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. Endorsements are add-ons that will pay a lump sum upon diagnosis of the critical illness mentioned in the plan.
Limit the debt
It is not advisable to go into debt during your retirement years. It will not allow you to live a stress-free retirement life. In addition, with a breakdown of 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.
Hence, it is essential to keep debts to a minimum and try to pay them off as soon as possible. If you’ve taken on a high priced loan, be sure to prepay as much as possible. The prepayment will reduce the principal amount and help you close the loan before its term. If you cancel a loan early, it will help you save big on interest and could also free you from debt when you retire.
Retiring early requires careful planning and, more importantly, making the right investments. Starting early is key as it helps you make changes halfway through if the need arises. Seek professional help if needed to make sure you are on the right track to having a wonderful retirement life.