Financial Planning
Retire early with a bit of planning and discipline
Many of you may be considering early retirement. You may want to give up the long working hours of a demanding job and instead spend the time doing what you enjoy. But is it possible to retire early without compromising on your current lifestyle? It is if you plan smartly. Let us see how.
Here are eight things to do if you are planning an early retirement:
1. Know the time-to-goal:
- Ask yourself when you want to retire. This will tell you the number of years before the financial goal.
- Get a fair estimate of how much to save and invest each month.
- Take into account life expectancy, inflation (both pre and post-retirement), the expenditure, rate of return, existing assets & liabilities, risk profile, asset allocation among many other variables to build the retirement corpus.
2. Make lifestyle changes:
- Avoid splurging on luxury items, dining out, exotic holidays, etc,
- Follow a disciplined lifestyle to stay healthy – both physically and financially
3. Keep your debt under check:
- Today, you can use credit cards or avail a loan to purchase the things you desire. However, it is equally important to repay your loans and credit card dues on time.
- Piling on too much debt will have a bearing on the money you need to save for retirement and may jeopardise your aim of early retirement.
4. Start saving and investing early:
- Start saving early to enjoy the benefits of compounding.
- Invest the money saved in productive and tax-efficient investment avenues depending on the time-to-goal in a disciplined manner.
- Solution-oriented funds, such as Retirement Funds are one option.
- These funds have a lock-in of 5 years or your retirement age, whichever is earlier.
- Hence, evaluate the scheme and plan thoroughly before investing basis the asset allocation, risk profile and time to goal. To select a Retirement Fund best suited to your needs, click here.
- If you have more than five years to retire, you may opt for Systematic Investment Plans (SIPs) in diversified equity-oriented mutual fund schemes
- However, if you are just few years (less than 5 years) away from retirement, limit your exposure to equity funds and consider debt mutual funds that invest in money market instruments or bank Fixed Deposits. This is essential to ensure so that the wealth generated is preserved.
- Public Provident Fund is a worthy avenue if you have around 15 years before retirement. Investments in PPF are eligible for a deduction under Section 80C (up to Rs 1.50 lakh). The returns are fixed and the maturity amount is also exempt from tax, making it an extremely safe investment.
5. Identify different sources of your income:
- Look for different sources of income such as taking up another part-time job, monetising a hobby, and/or even renting out a property (residential or commercial).
- This would be helpful when you plan to retire early.
6. Ensure you are adequately insured:
- Buy adequate health insurance for you and your family members to avoid a financial burden on account of a medical emergency
- Likewise, make sure you have an optimal life insurance cover to ensure a secure future for your spouse and children in your absence.
[Also Read: The Prudent Approach to Your Retirement Planning]
7. Build an adequate contingency fund:
- Have an adequate contingency fund (also known an as emergency fund or a rainy day fund), which takes care of around 6 to 12 months of unavoidable expenses, including the EMIs on loans.
- This will offer you the required cushion in case of an unforeseen emergency.
8. Do not dip into your retirement savings before you retire:
- Do not withdraw from your retirement corpus for meeting other financial goals. Or you may need to continue working for longer than you plan, to build your corpus again.
- Even if you retire early, invest in investment avenues that match your risk profile post retirement to earn enough returns to account for inflation
- It is not advisable to hold the entire corpus in bank FDs once you retire. A portion of your retirement corpus - say 25-30% (depending on your risk appetite) - should be in mutual fund schemes, whereby you can clock an effective real rate of return.
- Once you retire, don't withdraw more than 3-4% from your corpus in a year, so that you do not exhaust your retirement corpus too soon.
Early planning and smart investing are key to building a sizeable retirement corpus. So start your retirement planning today!
Disclaimer: This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm. Axis Bank doesn't influence any views of the author in any way. Axis Bank & PersonalFN shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.
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