Retirement Planning – A Comprehensive Guide
Some people may be married to their work. For others, however, working for long hours becomes a habit. If this sounds like you, then you’ve probably contemplated retiring by your early sixties or late fifties. And this is a goal that doesn’t come easy. It takes a lot of careful planning to successfully achieve the financial standing needed to stop working early in life. If you’re interested in learning more about how to retire early, this guide can help you get started with all the financial strategies needed for getting your early retirement goals done.
What is considered as early retirement, really?
With regard to financial planning, retiring at any age prior to 60 is considered to be early. Many people find that with the right planning, it’s easy enough to retire by 60. However, for the folks who’re keen on accomplishing this life goal by 55 or earlier, it takes the right kind of financial habits to get there. As a general rule of thumb, if you haven’t set any particular age for retirement yet, you could strive to retire before you get into the senior citizen bracket. This is a reasonable enough objective to have on your financial to-do list.
Some professions make it easier for the people involved to retire by their mid-fifties. For instance, military servicemen find that once their contract in the forces comes to an end, they’re eligible for full pension and retirement benefits. Other professions like teaching and medicine may not be conducive to early retirement, either because it may not be possible for individuals to accumulate a corpus sizeable enough to support their lifestyle after retirement, or because the people in those professions may grow attached to their professions over the years.
Either way, if you’re entirely certain that you want to bid goodbye to the 9-to-5 routine before your golden years, there are many retirement plans in India developed specifically to help you achieve this objective.
How to retire early?
Voluntarily handing in your resignation letter by your fifties, catching a flight out of the city, and hopping from one exotic destination to the next – this is a pipedream that most people in the average corporate setup have had at some point during their career. Interestingly, by planning it right, this need not be just a fantasy. It’s practically possible to achieve the goal of early retirement and enjoy your golden years doing the things you’ve always wanted to do.
So, the question of the hour is this – how to retire early? Is it enough if you simply develop a retirement investment plan? Or do you need to acquire other everyday habits that can help you get closer to this goal? The answer is that the journey to early retirement requires you to do both. You need to adopt the right habits as well as invest in the many retirement plans in India available for this very purpose. Here are some strategies that can help.
10 essential strategies that can help you get started with early retirement
1. Chart out your retirement goals clearly
The first thing you need to take care of before you chart out your financial plan for an early retirement is figuring out what you want your post-retirement life to be like. Do your retirement goals include traveling the world or learning a new skill? At what age do you plan to retire? And how much money do you need to sustain the kind of lifestyle you intend to enjoy during your golden years?
These are some of the questions you need to sort out before you put your plan in place. You also need to establish your retirement budget well in advance, so you can ensure that you save up enough money to meet your everyday expenses after you’ve retired. Determining these parameters clearly makes it possible for you to adopt the right approach towards investing for your golden years.
2. Take stock of your current expenses
To get a realistic idea of the earliest age by which you can retire, you need to take stock of your current spending habits. Even the people who believe they live extremely scrupulously may be surprised to find certain loopholes in their budget, causing them to spend more than they intend to. Something as small as grabbing a cup of coffee to-go each morning before you head to work can add up to a sizable expense by the end of each month.
While it’s not particularly a terrible thing to spend on life’s little luxuries, it’s always a smart move to remain aware of where each penny you earn goes. To get started, you can maintain a monthly account of every expense you incur, no matter how small it is. Compare the data for a set of 3 to 6 months to figure out if there are any outlays that take up more money than they should.
3. Live below your means
One thing most people who’ve happily retired by the time they’ve hit 60 have in common is that they live well below their means. If your expenses eventually exceed your earnings, it’s practically impossible to accumulate long-term wealth. Living frugally ensures that you spend less than you earn, thereby leaving you with enough funds to park in a retirement investment plan.
To begin with, you need to identify the areas in your everyday spending habits that cost the most. For a significant majority of the people, aspects like food, transportation, or housing make up the biggest areas of expenditure. While it’s not possible to eliminate these outlays entirely, it’s certainly feasible to reduce the money you spend on these major heads of expenditure. Some ways you can achieve this goal include saving eating out for special occasions, taking the public transport system where possible, and opting for affordable housing.
4. Eliminate debt
Debt can often be the single biggest deterrent to retiring early. Instruments of consumer debt such as housing loans, car loans, and personal loans often come with high rates of interest. To reduce the amount of monthly instalments, you may have to extend the tenure of repayment. And doing this can take a huge block of years from your life. Alternatively, if you opt to repay your loans early, you’ll not have to deal with high EMIs.
It’s advisable to choose an option that fits in well with your financial situation. Nevertheless, however you decide to deal with your borrowings, try and ensure that you eliminate all debt well before you retire. Carrying your liabilities into your golden years can prove to be a fatal financial mistake that can dig into your retirement fund at best or force you to head back to worst. Both these options are not only inconvenient, but also defeat the entire purpose of retiring early.
5. Obtain an alternate source of income
One source of income may be enough if you’re a frugal spender. However, if the kind of lifestyle you intend to enjoy after you retire involves luxuries of a certain standard, it may be essential to obtain an alternate source of income during your working years. Even if you’re unsure of the kind of life you want to experience post-retirement, it’s worth picking up a side hustle to supplement your primary source of income.
Some side hustles may require a little or a lot of your time, and they may only be good options if you work part-time elsewhere or if you have flexible working hours at your primary job. However, the good news is that side hustles don’t always need to be second jobs that you need to actively participate in. You could even leverage an asset such as real estate to generate passive income for you on the side-lines.
6. Follow a retirement investment plan
Investments undoubtedly need to form the core of your retirement planning. The best time to formulate your retirement investment plan is as soon as you receive your first salary, so you can start saving up right away. To begin with, consider investments that allow you to park small amounts of funds periodically, on a monthly, semi-annual, or annual basis. Systematic Investment Plans (SIPs) can be a great place to start, since they allow you to begin investing with amounts of money as small as Rs. 1,000 per month.
Another key instrument to invest is insurance, so you and your family have a safety net to fall back on, in the future. Mutual funds, equities, and deposits are also excellent options to consider. Over time, make sure you look into other retirement plans in India, so your investment fund can grow into a corpus that’s large enough to support your lifestyle after you’ve retired.
7. Automate your savings
Your savings shouldn’t be something that you only revisit at the end of each year. Ideally, you need to ensure that you contribute to your savings on a monthly basis, so you can make it a habit. Unfortunately, this can be difficult to do each month, because you never know when an emergency situation can take your focus away. A good alternative to this is to automate your savings. You can have an early retirement plan to start with which would take care of your savings to get your early retirement life goals done.
Instead of manually managing your savings plan, you can set up automatic debit mandate that make it possible to transfer money from your savings accounts to your investment accounts spontaneously on the dates specified. This system ensures that irrespective of what’s keeping you busy; your investment plan continues to remain on track.
8. Pay attention to your taxes
Over the course of your career, as you advance up the professional ladder, your income will likely continue to increase. After a certain point, you may find yourself being propelled into the highest tax bracket, where a little over 30% of your earnings will go on to contribute to your tax liability. Without careful tax planning, your taxes can quickly erode your retirement investment budget significantly.
To ensure that you avoid this costly mistake, take advantage of the many provisions available in the Income Tax Act, specifically included with the intention of reducing the tax burden on individual assessees. Section 80C is a key element here, since you can enjoy deductions up to Rs. 1,50,000 for various investments made by you during the financial year. Additionally, if you’re a salaried employee, there are many tax-free perquisites that you claim an exemption on.
9. Revise your retirement plan as needed
To retire early, not only do you need a good retirement plan, but you also need to ensure that it’s financially relevant. And while it’s always a good move to chart out a financial plan for early retirement as soon as you earn your first pay check, it’s also essential that you revisit it from time to time to ensure that it’s the best course of action for you at various stages in life. Failing to modify your retirement plan as needed can make it redundant in as little as 5 years.
Tax laws change frequently, banks and lenders revise the interest rates on loans and deposits, and the return on investment for various options continue to fluctuate year after year. Taking stock of your retirement plan on an annual basis can help you evaluate the relevance of your investment portfolio. It also gives you the chance to take advantage of the newest financial developments.
10. Take the help of a financial advisor
If you’re unsure about how to begin planning for early retirement, you can always talk to a financial advisor and seek their professional assistance. Financial advisors, being experts in areas like giving investment advices, taxation, and general financial planning, can create a retirement plan that’s just right for your specific goals. Alternatively, if you already have a plan in place but require some advice on how to improve it, a financial advisor can help you out.
To develop your retirement plan, a financial expert will require details like the age at which you wish to retire, the amount of corpus you intend to accumulate as your retirement fund, and the kind of goals you wish to pursue in your golden years. With these details, your financial advisor can figure out the best way for you to invest your money during the years you’re working.
By following these small tips, you can realize your dream of retiring early with a reasonable fund to get you through your golden years. When you’re getting started, remember to set reasonable goals for early retirement. Impractical targets will only set your plan back, making it harder for you to revise it later in life. So, start by taking small steps toward the goals you’ve set, and revisit your plan periodically to ensure that it remains aligned with your overall objective.