Almost all of us desire to retire early. Yet, for almost all of us, early retirement is a BIG challenge.
Because: What we may save during our working life, may not appear to be sufficient to comfortably see us through the years of retirement.
Increasing life span makes it crucial for us to plan for a post-retirement life of at least around 25 to 35 years. This, by no means, is easy.
On one hand, inflation will erode the purchasing power of money. So, as years go by, most of the things that we use everyday would become expensive. In other words, the cost of living is bound to increase.
On the other hand, our risk taking ability will go down, making us shift to safer investments. Plus, as the Indian Economy matures, the interest rates and stock market returns will continue to moderate. So, as years go by, the return from our investments is likely to decrease.
Hence the fear that our retirement corpus may not last our lifetime!
So, what should you do if you're keen not only to retire early and but also enjoy a pleasant retired life?
There's a two-step process to do so... Estimate and Accumulate.
Step 1: Estimate
Naturally, the first step is to work out the amount that would be required as your retirement corpus.
Let's make some general assumptions and see what this number could be.
Present Age : 35
Retirement Age : 50
Lifespan : 85 years
Monthly expenses : Rs.35,000 (at current prices)
Average long term inflation : 6.5% p.a.
Average returns : 8% p.a.
Based on the above, you will need around Rs.3.20 crores when you turn 50, to pay for the inflation-adjusted living expenses till the age of 85. For example, when you retire after 15 years, the average monthly expenses would have shot up from Rs.35,000 to Rs.90,000 per month.
Beware!
This Rs.3.20 crores of retirement corpus covers only the basic living expenses.
To this you must ADD certain large expenses that you would have to incur from time to time. This includes health insurance premium, medical needs not covered under the policy, home repairs and renovation, social commitments, vacations, etc.
To this you must ALSO ADD expenses that you are likely to incur on your children's education and marriage, which will happen post-retirement (especially when you retire early).
To this you must ALSO ADD any unpaid debt that you are likely to have when you retire.
To this you must ALSO ADD expenses, if any, towards your elderly parents.
In short, anything between Rs.5-10 crores would be a reasonable corpus to have at retirement.
Warning: You need to be very conservative in estimating the retirement corpus. So, make your assumptions with some decent margin. Don't cut it too fine.
In fact, there is no harm in building a sufficient buffer. After all, any excess amount leftover will go to your children as a legacy.
Step 2: Accumulate
Great! Instead of ambigously stating that you wish to retire early, you now have a clear-cut target number that you have to achieve.
And, you have many ways to work towards to the same.
Hence, to accumulate the said retirement corpus, you have to construct a portfolio that is well-diversified, balanced and suited to your financial profile. It has to have an appropriate mix of stocks, mutual funds, deposits, bonds, property and gold.
In this regards, there are some standards rules to follow:
i. Many people forget to create a portfolio and put all of their eggs in one basket... typically real estate. Because of this they miss the golden opportunity which is the equity markets. Equity is an excellent tool to build wealth over long term.
ii. When you're young, the riskier but more lucrative assets like stocks and equity based mutual funds could form a larger portion of your portfolio. Later, as you move into your late 40s, you can switch to a more stable portfolio with more deposits and bonds.
iii. Another manner to create wealth over the long run is to take loans wisely. Mortgage loans are an essential instrument that one could use from pretty early in life. While home loans may be useful, excessive debt on credit cards / personal loans is surely dangerous. So use debt with utmost care and caution.
Don't forget to also read the 20 Ways To Boost Retirement Fund (When You Haven’t Saved Enough) for many more ways to move towards your dream of early retirement.
While the large number may look difficult and daunting, you have two important advantages in your favour:
a. As you move up the career graph, your income will multiply. This will leave you with lots of extra cash every year, which you can invest towards your goal.
b. The power of compounding will multiply your corpus, beyond all imaginations.
Bottomline is that you MUST START NOW.
If you start early, plan judiciously and invest prudently, there is no reason why your dream to retire early — and live comfortably thereafter — cannot become a reality.
Because: What we may save during our working life, may not appear to be sufficient to comfortably see us through the years of retirement.
Increasing life span makes it crucial for us to plan for a post-retirement life of at least around 25 to 35 years. This, by no means, is easy.
On one hand, inflation will erode the purchasing power of money. So, as years go by, most of the things that we use everyday would become expensive. In other words, the cost of living is bound to increase.
On the other hand, our risk taking ability will go down, making us shift to safer investments. Plus, as the Indian Economy matures, the interest rates and stock market returns will continue to moderate. So, as years go by, the return from our investments is likely to decrease.
Hence the fear that our retirement corpus may not last our lifetime!
So, what should you do if you're keen not only to retire early and but also enjoy a pleasant retired life?
There's a two-step process to do so... Estimate and Accumulate.
Step 1: Estimate
Naturally, the first step is to work out the amount that would be required as your retirement corpus.
Let's make some general assumptions and see what this number could be.
Present Age : 35
Retirement Age : 50
Lifespan : 85 years
Monthly expenses : Rs.35,000 (at current prices)
Average long term inflation : 6.5% p.a.
Average returns : 8% p.a.
Based on the above, you will need around Rs.3.20 crores when you turn 50, to pay for the inflation-adjusted living expenses till the age of 85. For example, when you retire after 15 years, the average monthly expenses would have shot up from Rs.35,000 to Rs.90,000 per month.
Beware!
This Rs.3.20 crores of retirement corpus covers only the basic living expenses.
To this you must ADD certain large expenses that you would have to incur from time to time. This includes health insurance premium, medical needs not covered under the policy, home repairs and renovation, social commitments, vacations, etc.
To this you must ALSO ADD expenses that you are likely to incur on your children's education and marriage, which will happen post-retirement (especially when you retire early).
To this you must ALSO ADD any unpaid debt that you are likely to have when you retire.
To this you must ALSO ADD expenses, if any, towards your elderly parents.
In short, anything between Rs.5-10 crores would be a reasonable corpus to have at retirement.
Warning: You need to be very conservative in estimating the retirement corpus. So, make your assumptions with some decent margin. Don't cut it too fine.
In fact, there is no harm in building a sufficient buffer. After all, any excess amount leftover will go to your children as a legacy.
 |
| Early retirement is not an impossible dream. You can surely achieve it. |
Step 2: Accumulate
Great! Instead of ambigously stating that you wish to retire early, you now have a clear-cut target number that you have to achieve.
And, you have many ways to work towards to the same.
Hence, to accumulate the said retirement corpus, you have to construct a portfolio that is well-diversified, balanced and suited to your financial profile. It has to have an appropriate mix of stocks, mutual funds, deposits, bonds, property and gold.
In this regards, there are some standards rules to follow:
i. Many people forget to create a portfolio and put all of their eggs in one basket... typically real estate. Because of this they miss the golden opportunity which is the equity markets. Equity is an excellent tool to build wealth over long term.
ii. When you're young, the riskier but more lucrative assets like stocks and equity based mutual funds could form a larger portion of your portfolio. Later, as you move into your late 40s, you can switch to a more stable portfolio with more deposits and bonds.
iii. Another manner to create wealth over the long run is to take loans wisely. Mortgage loans are an essential instrument that one could use from pretty early in life. While home loans may be useful, excessive debt on credit cards / personal loans is surely dangerous. So use debt with utmost care and caution.
Don't forget to also read the 20 Ways To Boost Retirement Fund (When You Haven’t Saved Enough) for many more ways to move towards your dream of early retirement.
While the large number may look difficult and daunting, you have two important advantages in your favour:
a. As you move up the career graph, your income will multiply. This will leave you with lots of extra cash every year, which you can invest towards your goal.
b. The power of compounding will multiply your corpus, beyond all imaginations.
Bottomline is that you MUST START NOW.
If you start early, plan judiciously and invest prudently, there is no reason why your dream to retire early — and live comfortably thereafter — cannot become a reality.
