Working towards an Early Retirement

Retirement. Does this word evoke images of sun and sand, books and movies, travel and sightseeing? Most of us, these days, want to retire early and enjoy life to the fullest.

If this is one of your dreams as well, it’s time you asked yourself this question – ‘Am I financially ready to retire early?’ Put pen to paper and work out the math. Are you really ready?

Let us look at some factors which influence the decision to retire early:

  1. Start saving early: If you have decided early in life that you will retire early, good for you. You must start saving as early as possible. The only way to make money grow is to give it time. Always remember – time spent in the market is more important than timing the market. The more you delay in starting to build your retirement nest egg, the more you will put pressure on yourself and you could finally end up not saving enough for the golden years.Clearly, saving has to be the top priority if you plan to retire early. Save first, and then use the rest to meet your monthly expenses.

Take for example four different people starting to save from different ages, but all wanting to retire early – at the age of 50:

Amount invested per month: Rs 10,000                  Assumed rate of return: 12% p.a.

Starting age

Investing for

Amount invested

Corpus created

25

25 yrs

Rs 30 lakh

Rs 1.88 crore

30

20 yrs

Rs 24 lakh

Rs 99 lakh

35

15 yrs

Rs 18 lakh

Rs 50 lakh

40

10 yrs

Rs 12 lakh

Rs 23 lakh

The above example clearly demonstrates the fact that a ten-year delay (age 25 vs. age 35) in starting can result in reducing your end-corpus to a third, leaving you with insufficient funds.

Also, plan to increase your savings rate annually and maximize your contributions as early as possible in your career.

  1. Don’t underestimate inflation: Most people tend to ignore the effect of inflation while computing the retirement corpus. It is crucial that you calculate your retirement corpus based on an inflation rate of 6-8 per cent. Inflation erodes the value of your money over time and the longer your retired lifespan, the more the reason to inflate your requirement. It is very important to ensure that your investments are earning more than the rate of inflation so that the real rate of return is positive. Conservative investors use fixed deposits to create their retirement corpus. But the interest you earn on the FD is taxable; so even if the interest rate looks attractive, you must view it in light of the tax you are liable to pay and the current rate of inflation. Assuming an interest rate of 9 per cent, if the investor is in the higher tax bracket of 30 per cent, the post-tax return works out to only 6 per cent. Now if you take the rate of inflation at 8 per cent, your real rate of return is a negative of 2 per cent. This negative return compounded over years can seriously dent the final number.
  2. Don’t start late: We have seen how a delay can affect your final goal. Procrastination is the major cause of people panicking and then buying all irrelevant products in a rush to try and achieve their retirement goal. If you seriously wish to retire early, it is imperative that you do not delay saving and investing for your retirement nest egg. People often start saving late in the belief that the Provident Fund (PF) will take care of their retirement years. This is not true.
  3. Plan your investments carefully:Retiring early requires meticulous financial planning. For instance, when you are young, you should take some risks. But as you get closer to your retirement age, you should become less aggressive. Returns from retirement schemes like the New Pension Scheme and other pension plans will kick in only from age 55 or 60. So till then, you would have to fend for yourself (assuming you decide to retire at 50).
  4. Don’t ignore healthcare expenses: Since your retired lifespan will be around 30-35 years, it is vital that you create a sufficient corpus exclusively to meet possible medical expenses. With rising medical costs, this corpus is a necessity; otherwise you will have to dig into your retirement kitty to meet these expenses. Even if you have a health cover, there is the chance of it not being sufficient. Also, there are fine points in every health cover and a certain portion of the expenses will have to be borne by you. Again, once you make claims the premium goes up. It could get prohibitive (in the retired years) if the incidence of claim is high. So if you have created an exclusive corpus by the time you retire, you are free of worries on the medical front.

To summarize, one should realise that retiring early means both shortening your savings window and lengthening the number of years your nest-egg has to meet your expenses. This longer retirement life-expectancy means more time for inflation to erode the purchasing power, making saving enough even more of a challenge for those who wish to retire early.

Finally, there is no harm in taking up part-time work if you find yourself behind in meeting your early-retirement goal.This reduces the financial stress and leads to a more fulfilling and satisfying retired life.