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Retire young

We are scared of retiring early at the cost of a regular source of income. If only we could be assured that financial security is possible. Asish Kapoor tells us more.

business Updated: Sep 13, 2007 00:02 IST

At some point in our life all of us have dreamt of retiring early and doing what we always wanted to. Some of us want to live in a cottage in the hills, others want to pursue passions like photography or theatre, while others just want a quiet life.

The only obstacle we foresee in realising these fantasies is financial security. We are scared of retiring early at the cost of a regular source of income. If only we could be assured that financial security is possible, that we won’t be left high and dry in pursuit of our dreams…

All over the world there are people who meticulously planned their financial future and then took the plunge. But to do this they started investing early – as early as possible and reaped benefits of the simple mathematical concept: compounding. They also invested in an aggressive portfolio to achieve the all-important, high returns. Gaining financial independence is one of the key pre-requisites for retiring early – owning a house and having good insurance policies are absolute essentials.

To begin with you need a home loan, in case you are not already living in your own house. It should be followed by a life insurance policy, which adequately covers the bread earner’s life. Along with life, it is also important to have a reliable and adequate health cover for all members of the family.

An early retiree's income must last far longer than a normal retiree's income. Factoring in inflation, the Retirement Fund has to be much larger in order to have a safety net. A major portion of the portfolio needs to be invested in equities to achieve high returns. Part of this exposure can be through the Systematic Investment Plan (SIP) route and the rest can be invested directly in stock markets.

It is advisable to have an aggressive and actively managed portfolio with an exposure to mid-caps, penny stocks, turnaround stocks and companies of emerging sectors. For this, one needs to have the time, knowledge and temperament to do equity research.

Alternatively, one can take the help of a good financial advisor who invests on your behalf and monitors your portfolio. One can also invest a small portion of the investment fund in exotic options like art, wines and precious stones. Though risky and illiquid, these investments have the potential to generate phenomenal returns in the long run.

To put these investment options in perspective, let’s look at a practical example. Mr Prudent is 30-years-old and wants to retire at 45. His current annual income is Rs 10,00,000 and his monthly expenditure is Rs 50,000. Considering 5 per cent per annum rate of inflation, his monthly expenditure at the time of retirement would be around Rs 1,04,000 per month.

To generate this monthly income, increasing at the rate of inflation, Mr Prudent needs a retirement corpus of Rs 1,82,09,590. This retirement option should be further invested in a relatively safer investment instrument, expecting 12 per cent rate of return to get a monthly income of Rs 1,04,000.

Now, to reach the target corpus of Rs 1,82,09,590 at retirement, Mr Prudent needs to start investing Rs 27,250 per month for the next 15 years, targeting a 15 per cent annual rate of return.

To conclude, listed below are some key points one should focus on if one wants to retire early:
* To be financially independent, you should own your house and take adequate insurance policies
* Money left after paying your housing loan EMIs and insurance premiums should be invested primarily in stocks with high-growth potential in a regular and systematic way
* Top-up your portfolio with some investments in unconventional options like art and precious stones

Realising your dreams is not difficult. What’s required is careful planning and execution and regular monitoring of your financial goals. Happy investing!

(The writer is CEO of Investshoppe)

First Published: Sep 12, 2007 23:52 IST