Money Rules of Early Retirement

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Planning retirement early is an art that wholly depends on how well you plan your finances to ensure fiscal independence. However, mere savings may not be enough given the rising inflation and expenses associated with a retired life bereft of any regular income. If you want to retire early, here are some thumb rules.

Early retirement is the personal goal I hear of the most these days. Among the young who are in their 30s, working for another 30 years seems daunting. It is now established that one won’t work for the same employer all life; but not willing to work at all is relatively new. But quite fair I would think.

7 Benefits of Early Retirement Planning in 2021

Here are seven benefits of early retirement planning, which may interest you to start your retirement planning as soon as possible, if you do not have a retirement plan yet:

1. Tax benefits of retirement plans

2. Safeguard your assets and have a secure future

3. Better returns on your savings

4. The power of compounding for retirement corpus

5. Unprecedented emergencies

6. Support your dependents

7. Start early for maximum benefits

1. Building a corpus to fall back on is Crucial

The corpus must be large enough to generate an income adequate to take care of the basics. There must be enough money to pay for rent, food, utilities and education and perhaps leave a small surplus for indulgences. This corpus must grow over the years, ideally at a rate that beats inflation.

2. Assess your Expenses

How much money you will need every month once you retire is more important than how much you spend now.

Start with essential expenses on food, rent, clothing, transportation, insurance premiums and money needed for other utilities. Do not ignore loans that you may have taken, check your credit card debt and work towards paying off all your bills, debts, and loans. It is essential to plan for a debt-free retirement, which means no accumulation of bad debts or saving enough to repay off the long-term loans even after you retire. Also, a lot depends on how early you wish to retire. If you will still have dependent children after you retire, you must allocate a sum of money to pay towards premiums in life insurance policies and continuing health insurance plans.

3. One must be willing to consider how these lifestyle changes

This will impact what one does for entertainment, social interaction, schooling, healthcare, and such everyday decisions that urban living allows one to take for granted. Many desire travel as their priority. Travel calls for good levels of physical fitness; willingness to put up with physical discomforts of travel; Comfort with new environments, languages and food; and so on.

4. Money Requirement

Now that you have budgeted your post-retirement expenses, focus on how much money you would need to retire. There are no fixed ways to evaluate this though the thumb rule is to set aside at least 25-30 times your budgeted yearly expenses on retirement along with enough cash to cover at least a year’s worth of expenses. Estimating your needs when you’re 40 or 50 years would require you to find out how inflation affects daily living costs. For example, your monthly expenses are ₹20,000 at present that translate to ₹2, 40,000 every year. Dividing ₹2, 40,000 by four per cent equals to ₹60, 00,000 per annum. This means that you would need ₹60, 00,000 every year after you have retired.

5. Save and invest regularly

Financial planning is futile without timely action. You must start saving early to ensure enough funds when you retire. However, saving alone will not help and, hence, you must choose from among the different investment options shares, mutual funds, exchange-traded funds, sovereign gold bonds, crypto currencies, real estate, fixed deposits, recurring deposit accounts, post office schemes, corporate bonds available to allocate your money in a way that yields you enough funds when required. The idea is to see your money grow.

6. Work out how much income you’ll have

Your total income is likely to be a lot more complicated than it was when you simply received your salary at the end of each month.

You might receive income from more than one pension, as well as from savings and from benefits or from a part-time job.

The first step is to add it all up.

  • Ask your employer for an illustration of the pension you’ll get if you take early retirement.
  • Get a forecast from any other pensions you have if you intend to start those early too. For example, a personal pension or one from a previous employer.
  • If you decide to buy an annuity or will be receiving payouts from a defined benefit pension, check whether they have built-in increases each year. You might want to put off claiming some pensions for now, or even save extra if they don’t.

7. Budget Planner

To work out how much money you have coming in and what you’re spending it on, use our Budget Planner

How you spend your money will change if you’re not going to work every day. For example, while travelling costs might come down, household bills might go up. You’ll also have to think about the loss of any workplace benefits, such as a canteen, company car or health insurance. Then there’s the cost of the lifestyle you want in retirement.

8. Active management of Investments

Investing money and then forgetting it is a deadly financial sin. Track your investments and check if your portfolio is diversified enough. For example, you can put your money in high-performing equity mutual funds or stocks if you are willing to take risks and wish to accumulate a large corpus after 15-20 years.

However, if you are a conservative investor and cannot handle the turbulent nature of the stock movement, approach debt fund that earn higher returns than bank deposits sans the risk of losing your investments. The real estate market is expected to boom with the market now opening to new business and employment opportunities post the Covid-19 pandemic. With home loan rates at an all-time low, it would make sense to invest in property now to sell it at a higher price later. To save on the money spent on payment of medical bills and expenses associated with both pre-and post-hospitalisation, you must buy proper health insurance that will take care of your treatment expenditure.

9. Do Experiments

Seventh, one should be open minded about calling off the experiment and returning to the mainstream if that is needed. Many like to take what they call a ‘break’ so they are able to experiment with an alternative and then make a choice. The early days of romanticising work from home and enjoying freshly cooked homefare with closed ones, has given way to frustration about being trapped indoors in these last 18 months. Novelty wears off faster than we imagine.