TL;DR
- The average retirement age in India is around 60-65. However, post-covid, many have been leaning towards early retirement. The FIRE (Financial Independence, Retire Early) movement advocates that instead of working till the age of 65, you should retire early and spend time with your family and friends and pursue your hobbies.
- An early retirement plan is devised based on your existing income and expenses, lifestyle, inflation rates, personal preferences, etc.
- Some things to consider before early retirement are if you’re debt-free, if you’ve saved enough for yourself and your family, your health-related expenses, and if you can sacrifice your current lifestyle to save money for early retirement.
- On the journey to early retirement, you need to calculate your potential expenses, decide on a retirement corpus and start saving for it. Invest in a variety of assets to generate passive income, and plan a withdrawal rate for your post-retirement life.
Introduction
Retirement is called the second inning of life. You work hard your whole life, and retirement is your “me-time” that you enjoy with your loved ones without any stress or worry. The average retirement age in India is around 60-65. However, matching the vibes with the west, post-covid, many individuals have shifted their attitude to work towards early retirement. According to a PGIM survey, the Indian population is getting bored with the concept of retiring at 60 and wishes to take this adventurous trip early.
Is early retirement on your list, too? If the answer is yes, you need to plan well in advance for your golden days, so you enjoy two six-month holidays each year for the rest of your life!
Let us help you achieve that.
What Is an Early Retirement Plan?
Have you heard about the FIRE movement? It refers to ‘Financial Independence, Retire Early.’ The term was popularized by millennials in 2010. However, it was coined way back in 1992 by Vicki Robin and Joe Dominguez in their book, ‘Your Money or Your Life.’ It is directly related to the attitude toward retiring early.
The FIRE movement advocates that instead of working till the age of 65, you should spend time with your family and friends and pursue your hobbies. In short, enjoy your life with the kaleidoscope of love and laughter instead of green bills.
In order to achieve that, the foremost thing to undertake is early retirement planning.
An early or pre-retirement plan is created based on your:
- Existing income and expenditure
- Future income inflow and outflow
- Health insurance
- Lifestyle
- Financial dependency on or by family members
- Investments and return on investments
- Preferred age of retirement
- The expected inflation rate
You have to meticulously plan each aspect of your retirement. The ideal scenario is to start early to retire early. If you are in your twenties and earning, start saving for your retirement. Given the inflation, you should save a sizable corpus for your retired life.
Things to Consider Before Early Retirement
Retirement planning at the age of 60-65 is a challenging task. Thus, if you are planning for early retirement, you need to know that it would be even more challenging. However, you can make the process smoother if you make a strategic plan for it. Here is what you should consider before retiring early.
1. Are you debt-free?
If early retirement is your goal, then getting debt-free should also be on the top priority list. Once you retire, you will have limited means to pay your debts, such as mortgages or any other loans.
You need to start planning to pay for your debt before you retire. If you are in your 30s and have just purchased a house, pay off that debt before you retire. This will save you headaches in your golden days. We also suggest you purchase life insurance to avoid burdening your family when you are no longer around them.
2. Have you saved enough for yourself and your family?
This is another important question you need to ask yourself, especially because while a few expenses may reduce with time, i.e., your child’s education expenses, you will have a new kitty of expenses, i.e., health, looking after your family with no active income flow, etc. As a result, you must thoroughly plan for early retirement and take into account all the potential income and expenses to decide on a corpus amount.
Also, if you think a few milestones related to your family may come at a later stage, like a wedding, start setting aside money for that to avoid it hurting your retirement corpus. You can consult a financial advisor if you find it difficult to do it on your own.
3. Consider health-related expenses
This is an expense that has the most potential to drain your retirement savings if not accounted for while planning. The solution is to opt for adequate health insurance from an early age and continue to update it as your lifestyle changes.
After the 40s, the probability of critical disease is high. At that time, you may face a proposal or claim rejection if you are buying a new policy or renewing a policy at a new insurer. Thus, make sure that you don’t change your healthcare provider after a certain age and buy a policy that covers major illnesses you can be prone to. Also, consider medical inflation while renewing your health insurance policies.
4. Can you sacrifice your current lifestyle to save enough and retire early?
Lastly, you need to ask yourself whether you can survive by living a minimalist lifestyle at present to save for your early retirement. This includes reducing all unnecessary expenses; no frequent luxury dining or trips or clubbing, no expenses on expensive devices, and so on.
In short, you have to take a step in the direction of savings whenever you are at the crossroads of making a purchase that is not required. It does not mean you stop enjoying life, but you have to see the bigger picture and spend money only when actually needed. Are you ready to do that?
How to Retire Early?
Now that you know the basics, let’s embark on the journey of early retirement.
1. Calculate potential expenses
This is the first step toward making your early retirement plan. Account for all the expenses you incur currently and the ones which you will continue to incur in the future, such as food, utility, commuting, healthcare, etc.
Make a list of these expenses in addition to discretionary ones, i.e., traveling, dining out, etc., and count the amount for a year. Divide that amount by 12 to reach a monthly number. You can expect an increase in this budgeting number but no reduction.
2. Decide a retirement corpus amount and start saving monthly
Once your expenses are clear, decide the corpus amount to fulfill your future financial responsibilities and live a comfortable lifestyle.
Let’s say your monthly expenses in the future would be ₹60,000.
60,000 X 12 months = ₹7,20,000 per annum
You decide to retire at the age of 47 and for illustrative purposes, consider that your life expectancy is 75 years.
Based on that, you will need a retirement fund to survive 28 years (75-47).
Thus, 7,20,000 X 28 years = ₹2,01,60,000 = More than ₹2 crore.
Here we haven’t considered miscellaneous expenses and inflation.
Accounting for miscellaneous expenses, we will get an amount closer to ₹2.5-3 crore.
Continuing the same example.
If you are 24 and want to save ₹3 crores by the time you turn 47, you will need to save roughly ₹25,000 per month or ₹3 lakh for the next 23 years to save ₹3 crores, given the rate of return is 11%.
Based on such calculations, you need to decide on a retirement corpus and start saving for that from now.
3. Decide on asset allocation
Once your saving corpus is decided, the crucial step is to make a call on where to park your money. If you are starting early, you have the option to decide on high-return assets with a little higher risk factor, such as equity instruments via mutual funds, stocks, ETFs, etc.
Along with that, you can invest in fixed income instruments such as bank FDs, bonds, National Pension Scheme, Provident Funds, National Savings Schemes, and more. Given the rise of digitalization, you also have the opportunity to invest in digital assets like cryptos, NFTs, etc. Check out Mudrex Coin Sets to learn more about how to include digital assets in your portfolio.
The ideal scenario would be to decide on an asset allocation ratio. It can be 60:30:10 in equity, fixed income, and alternative assets–you will benefit from diversification, too.
4. Withdrawal rate
While many talk about saving for retirement, hardly you would get advice on what to do with your retirement money! There is no meaning in keeping ₹3 crores in your bank account for like 30 years! The best choice would be to withdraw it systematically.
It is said that a 4% withdrawal rate per annum is a preferred choice. However, the actual amount may vary depending on the income flow you will need. Decide on a withdrawal rate to avoid outliving your fund.
What Are the Pros and Cons of Early Retirement?
Let’s see the pros and cons of retiring early.
Benefits of early retirement
1. Spend time with your loved ones
This is the biggest advantage of opting for early retirement. You get to spend a great deal of time with your family and friends and can literally do whatever you want to do. For you, life would be a Sunday, seven days a week!
2. Travel the world
A lot of people retire early to become a nomad and travel the world. If you save enough money, you can also include yourself in the list of wanderlust and tick off any corner of the world, from the northern lights to Santorini. The sky’s the limit for you. Given the tech advancements, that, too, wouldn’t be a limit in the future!
3. Pursue hobbies or start a new venture
Earning money for fulfilling responsibilities and earning money for doing something you always wanted to do are two different things. Once you have no other commitments, you can spend time achieving your goals, whether it’s opening a small coffee shop or teaching how to play the violin. It is your time to ‘venture’.
4. Save tax when you invest
You can get tax benefits under section 80c of up to Rs. 1.5 lakh when you invest in specific instruments as described by the government for your retirement savings. These instruments include NPS, NSC, PF, post office deposits, ULIP, tax-saving FDs, ELSS, Senior Citizens Savings Scheme, etc.
Shortfalls of Early Retirement
1. No compounding investment returns
This is a negative trait of early retirement; because you withdraw funds early, the compounding benefit gets lost. For example, compounding returns for a 30-year period would be significantly higher than for a 20-year period.
2. Outliving your investment
If you fail to plan well for your early retirement, the chances of you outliving your retirement sum are very high. It can be very hard at that time to find new income sources to survive. Thus, do not take this lightly.
3. Minimum lifestyle expenses
You have to give your maximum effort at present by sacrificing on expenses to make your retirement goal achievable. You might not be ready to have a simple lifestyle and may find it difficult to make a new normal. However, this disadvantage is a long-term advantage.
Conclusion
Are you ready to retire early from work emotionally and financially? Have you decided what you will do with your time? Will you be able to maintain a comfortable lifestyle after retirement? If the answers are yes, start working on an early retirement plan. Remember that making a plan is just 50% of the work; you will need well-execution to make it to 100%. Start early if you want to retire early.
FAQs
1. Is retiring early a good idea?
Retiring early brings a lot of new experiences in your life, like traveling, starting a new hobby, or doing anything you like. You can spend an ample amount of time with your family and friends, which is a treat in itself. If you have planned well and have a concrete retirement strategy, definitely, retiring early could be a good idea.
2. How much do I lose if I retire early?
There are no specific losses of retiring early. However, you may lose the compounding returns, which depend on how early you retire, your withdrawal rate, and the total investment amount. Instead, you gain ‘time’ which is the most valuable currency.
3. How should I invest if I want to retire early?
You should ask yourself a few questions to decide whether you are ready for retirement or not: Am I debt-free? Do I have enough savings? Will I be able to curb existing expenses to save a huge retirement corpus? Are my medical expenses sorted? Do I have dependents, and will I be able to look after them? Am I emotionally ready to retire? If the answers are yes, you are ready to retire early.
4. How can I create wealth and retire early?
You need to make an early retirement strategy to achieve this target. This includes steps such as forecasting your future expenses, deciding on a retirement corpus amount, calculating the monthly investment amount, deciding on the asset allocation ratio, and lastly, making a decision on the rate of withdrawal from the fund. If you maintain consistency, you will be able to retire early and create wealth.
