Early retirement might be quite common in the West. In India; however, we have never been able to embrace the true concept of early retirement in its entirety. All we did was mistakenly consider voluntary retirement (VRS) to be early retirement and that’s it. This changes now!
Nowadays, more and more individuals in their late 20s and early 30s are planning for early retirement and enjoy life to the fullest, rather than sitting behind cramped-up cubicles and counting their days. Which brings us to our topic of discussion, how can one retire early and never have to work again? Is it possible to live comfortably after retiring early? Of course, it is.
The key to retiring in your 40s is to have enough investments and bank balance to support you and your future needs. That said, most people earlier believed that saving a portion of their income till the retirement age would be enough to support them financially after retiring.
Given the fickle nature of money-markets today and rising inflation rates, this approach is never going to cut it. What you can probably start doing in your 20s is to spend 30 percent of your income while placing the remaining 70 percent into a savings plan and multiple investment alternatives. In addition to it, here are three practical steps to help you plan early retirement.
Never Consider Early Retirement as An Alternative
In our 20s, when we get our first jobs after finishing up college, the idea of a fixed monthly income and financial independence does seem exciting. Moreover, why not? You execute your responsibilities and see the paychecks dripping in your account.
Retiring early; however, is a different ball game altogether. Many people dream of early retirement, but only a few determined souls eventually achieve the goal. Therefore, it is crucial that you make early retirement as your only life goal and not just an alternative. Only then, will you be able to free yourself from the habit of working a 9-5 job and plan for a comfortable future.
Create A Corpus That is 25 Times Your Annual Expenditures
This statement is based on the Trinity Research Study for a traditional retirement that would span over a maximum of 30 years. According to the study, if you are considering early retirement, you need to take your annual expenditure and multiply it by a number, anywhere between 20 and 50. That would be your retirement number. If you multiply by numeral 25, you will get a retirement corpus that would last for a period of 30 years if you were to use a 4 percent Safe Withdrawal Rate implicitly.
There are; however, several limitations to the 4 percent withdrawal rate. First, the stock market is prone to give negative returns on investments during market downturns. Therefore, you cannot get a guaranteed positive real return of 4 percent each year. Secondly, you may have to spend the corpus on unforeseen old-age healthcare expenses while taking care of inflation in the health insurance premium.
So, what to do now? You needn’t worry about creating a corpus that is 40X or 50X by the age you would think about retirement. That would be highly impractical. Instead, a practical plan in this situation would be to stick with the original 25X corpus as a safety net and follow the following approach:
You can set a target to reach the 25X corpus within 10 to 15 years to gain financial independence. For this, you would have to start investing and saving in your 20s, if possible and achieve at least a savings rate of 50 percent.
With the safety net in place, you can think about quitting your job and create additional sources of income base on your real interests. For example, you may start a lifestyle blog, learn how to play a musical instrument and then teach it to others, or turn your passion for painting into a full-fledged commercial enterprise. It would take up to 3 to 4 years, but eventually, it’s your additional income source that would start covering your living expenses.
Subsequently, you can proceed to invest any surplus from your additional income in growing the already available 25X corpus into say a 50X corpus over the next ten years. This way, you can think about taking early retirement from your job and focus on yourself and your loved ones.
Acquire Income Producing Assets
Besides starting to invest into various alternative investment sources, you must also shift your focus to acquiring some income-producing assets and properties. For example, you may choose to live in a multi-family home rather than purchasing a single-family home. This would help you save on rents and avoid any offsets that can increase your cost of home ownership.
Another approach here would be to invest in quality instruments such as a ULIP plan that would pay consistent dividends over a long-term and avoid taking a hefty home loan. Eventually, your lack of debt combined with your income assets will help you realise your dream of early retirement.
Be Tax Centred While Making the Investments
With a retirement plan under your belt, you can be sure to experience financial independence after retirement. That said, the sooner you start investing for your retirement, the earlier you are entitled to avail regular pension, guaranteed benefits, and life insurance cover along with a variety of tax benefits under Section 80C and Section 80CCC.
Therefore, while making investments for your early retirement, be sure to be flexible and tax-centred while choosing the retirement plan of your choice, be it is an immediate annuity plan or a traditional pension plan.
Early retirement may seem like a long shot to you right now, but it’s not at all improbable. To realise it, all you must do is make some smart lifestyle choices and create a retirement corpus while you’re still working. It is also essential to protect yourself and your loved ones from unforeseen medical expenses and unexpected life events such as death.
Here, buying a ULIP plan can help you kill two birds with one stone: invest in market-linked investment funds and avail life insurance cover for the entire policy duration. Leading insurers in India, including Future Generali, also offer you the options to switch between funds of varying risks, as many times as you want during a financial year and at no extra cost.