Early Retirement Planning

Table of Content

1. How to Plan for Early Retirement?

2. How Much Money Do You Need for Early Retirement?

3. Advantages of Early Retirement

4.Disadvantages of Early Retirement

5. Summary

6. FAQs on Early Retirement

How to Plan for Early Retirement?

How to retire early in India, especially in the next few years, is the desire of many people during their career days. Being relaxed and stress-free at an early age is the only reason. This is possible only if you have a retirement kitty that can last as long as you live. A financial retirement security can be a far-fetched goal without a proper plan. Here are some tips for an ideal retirement plan:

• Choose the Right Investment

Early retirement restricts the timeframe for savings. If you start saving at 25 and plan to retire at 50, you have only 25 years for investment. Considering the inflation rate, choosing the right investment instruments that offer higher returns over time is crucial. Investment choices that help build a sizeable corpus are the solution.

An array of investment options including life insurance, fixed deposits, equity-based and annuity plans, pension plans, etc., are available in the market that not only help build a substantial corpus but also make available a regular income stream. Make an informed decision by comparing the plans and choosing the ones that align with your financial goals.

• Raise the Investment Amount

If you are planning for early retirement any additional income like incentives, bonuses, investment gains, etc., should be allocated for savings and investments. Inflation is one aspect that has to be kept in mind when you are building retirement funds as it greatly impacts your savings and investments. With the inflation rate on the high, your retirement income may not be adequate in the future. To keep pace with the increasing inflation rate, you should increase your investment amount every year.

• Regularly Manage Your Investments

A comfortable retirement is only when you are financially equipped to manage your expenses and fulfil your retirement goals. Consistency in investment is the mantra for building a substantial corpus. To boost the returns on your investment, managing your investments is important. Monitor your portfolio regularly and make corresponding adjustments to align with your financial goals. Your goals keep changing with every life stage and your investments should be reworked accordingly. The returns should also be able to counter the inflation. Seek the help of financial advisors if necessary, for better management of your investments.

• Get Health Insurance

Employer-sponsored health benefits cease the moment you retire. Henceforth you will have to manage your medical expenses which may deplete your savings without a regular income stream. For your financial well-being, it is essential to purchase a comprehensive health insurance plan that covers hospitalisation, regular annual check-ups, prescription medicines, etc. The health insurance plan will take care of any medical emergencies without disrupting your savings.

As you grow older your healthcare needs increase. You are more susceptible to lifestyle-related ailments and critical illnesses as you age. Modifying your healthcare plans for proper coverage to match the rising costs becomes necessary. In addition, having a health insurance plan in place will enable you to enjoy your early retirement in peace without having to worry about medical bills at present or in the future.

How Much Money Do You Need for Early Retirement?

Though 60 years is the traditional retirement age, nowadays, individuals intend to retire earlier. To achieve this early retirement goal, your savings should be significant. You should have a robust financial plan, which means considerable compromises.

Following the FIRE principle, i.e., Financial Independence Retire Early, helps formulate the early retirement plan. If you intend to retire as early as 40, you should save 50% to 70% of your income. To build a huge corpus for a comfortable retirement, you have to spend little and save more. Ensure you spend only on needs and not wants. Try to avoid impulsive buying. Eliminate unnecessary expenses to make more room for savings.

It does not stop at that. Prudent retirement planning for growing your savings is important. Invest in diverse assets to balance rewards with risks. Choose a combination of market-related investment plans such as mutual funds, ULIP which is a life insurance policy with both life cover and investment components, etc., and safe investment options like NPS, PPF, etc.  This will help create a sizeable corpus for financial stability during post-retirement years and financial protection for your family in your absence.

To retain the financial security built, you should withdraw the funds prudently. The 4% rule will help you here, i.e., withdraw 4% of your total corpus during the first year of retirement and then adjust the subsequent withdrawals to the annual inflation rate. 

Advantages of Early Retirement

Retirement is the time when you have ample time to fulfil everything on your bucket list. It is even better if it happens early in life when you are young and fit. Here are some of the advantages of early retirement India:

• It Might Be Good for Your Health

The stress of meeting targets, extended working hours, etc., can take a toll on physical and mental health. By opting to retire early, you can relax, focus on keeping fit and healthy, and devote time to hobbies. With robust health, their quality of life also improves.

• You’ll Have More Time to Travel

If you retire early, you will have all the time to travel to places that you always wanted to visit. There is no restriction on the number of vacations to plan in a year. Moreover, being physically fit for more years creates a better scope for extensive travel plans.

• It's a Chance to Begin a New Career

If you plan to switch careers, early retirement is the best idea. You are an eligible candidate for jobs with more active years ahead. If entrepreneurship interests you, then starting a business sooner is better. Young people have a better chance to experiment and get into a new venture than individuals who retire later in life, i.e., at 60 or 65.

Disadvantages of Early Retirement

Early retirement without a clear vision and purpose has its disadvantages as well. They are:

• It Could Be Bad for Your Health

While at work, you have a schedule to maintain, and you remain active. Early retirement India disturbs this schedule, and you are prone to loneliness and boredom. This can hurt your health. Just being aware of how to retire early in India is not adequate. You should also know how to make your decision productive. You end up with physical and mental health issues if you are not active and socially connected.

• Your Social Security Benefits Will Be Less

Early retirement can impact your retirement benefits. The quantum of retirement benefits, such as gratuity and pension sacrifices, can be substantial. Even if you opt for commutation or surrender of a part of your pension for a lump sum amount, the difference will be vast. Retirement benefits are proportionate to the length of your productive career. If you retire at 40 instead of 60, you forego benefits applicable for 20 years of service, which can be enormous.

• Your Retirement Savings Will Need to Last Longer

Assume your early retirement plan is excellent; you have ample savings and are financially equipped to continue with the same lifestyle even after retirement. Even then, if you retire at an early age, there is a possibility that you will outlive your savings. For instance, if you retire at the age of 60 and live up to 80 years, your savings should last for 20 years. However, if you retire at 40, your savings should last for 40 years. Working longer will enable you to stay invested longer and get higher returns.

• You’ll Need to Get Health Insurance

As long as you are employed, you are covered under the Group Health Insurance Plan, and your employer pays the premium. With an additional premium, you can have coverage for your parents and spouse as well under the plan. If you opt for early retirement in India, you will no longer be covered under the plan, and you will have to pay for health cover.

The mounting insurance costs can consume a large part of your savings. Moreover, as you age, the premium also increases, which may disrupt your retirement planning to a large extent.

• You Might Get Bored and Miss Your Job

Early retirement disturbs your daily schedule. Unless you have alternative plans to keep yourself busy, adjusting to the new routine can be challenging. If your job was what you loved to do, then it is even more difficult. You start missing your job and your colleagues. As a result, boredom and loneliness set in.

Summary

Early retirement is a difficult decision to make. Understanding how to retire early and lead a stress-free life needs diligent financial planning including aggressive savings, having diverse investment avenues including PPFs, mutual funds, stocks, etc., creating parallel income streams like rent, dividends, etc., and having proper health coverage. Clearing off debts early is crucial to avoid EMI payments post-retirement which can affect your savings. With the right investment strategies, individuals can lead a comfortable retired life without compromising on the lifestyle.

FAQs on Early Retirement

Q. What is early retirement?

Retiring before the traditional age of 60 is considered early retirement. Retiring early seems exciting for those who look forward to engaging in new hobbies, travelling, or starting a new chapter in life. Early retirees should focus on creating a retirement kitty and a regular income stream to manage expenses without a full-time job as long they live.

Q. What is the main reason for early retirement?

The main reason for early retirement is to have more time to engage in pursuits of interest. It could also be to change careers, to take care of family, or for health reasons.

Q. How to plan early retirement?

To plan early retirement you should have financial stability to sustain your needs lifelong. Make smart investment decisions to create an adequate corpus and a regular income stream. Start investing early so that there is sufficient time for your investment to grow. Review your investments regularly. Make necessary adjustments for the returns to align with the rising inflation rate and your changing financial goals.

Q. What investment strategies are best for early retirement?

The best investment strategies for early retirement are:

• Start early and save aggressively during your working days.
• Diversify your investment. Invest in various instruments like mutual funds, PPFs, stocks, etc., for long-term growth.
• Have a parallel income via dividends, rent, etc., and stabilise your finances.
• Pay off debts early.
• Invest in a comprehensive insurance plan.

Q. What is the best age for early retirement?

The best age for early retirement is between 50 and 55 when you are still fit and fine. By this age, you can create a substantial retirement corpus while you have ample years ahead to enjoy your relaxed and stress-free life. However, to retire at this age, you should have a solid retirement plan for a sustainable income source and proper health insurance coverage.

Q. Is it a mistake to retire early?

Early retirement can end up being a mistake if your financial planning is weak. Your savings will erode, and you will be under financial stress very soon. On the other hand, if you have a sound financial plan and have created a sizeable corpus to maintain your lifestyle even after retirement, an early retirement plan can be a smart choice. You will have enough time to follow your passion and do the things you like.

Q. What is the hardest part of retirement?

The hardest part of retirement is defining the daily schedule. With the routine governed by a job, many individuals find it hard to adjust to the changed scenario. Not paying much attention to this aspect of retirement can impact their individuality and self-confidence. It can be hard to adjust to retirement unless you have hobbies or activities that keep you socially connected and create a purpose.

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Reference links:

https://news.cleartax.in/early-retirement-planning-heres-how-to-go-about-it/10001/

https://economictimes.indiatimes.com/wealth/plan/planning-to-retire-in-10-years-know-how-a-rs-23000-monthly-investment-can-help-you-in-your-retirement/articleshow/113327200.cms?from=mdr

https://www.investopedia.com/articles/personal-finance/073114/pros-and-mostly-cons-early-retirement.asp