Personal Finance: How to plan for an early retirement

How much money you will need every month once you retire is more important than how much you spend now.
Personal Finance: How to plan for an early retirement
Personal Finance: How to plan for an early retirement
Published on Aug 23, 2021 12:45 AM IST
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By Abeer Ray

Planning retirement early is an art that wholly depends on how well you plan your finances to ensure fiscal independence. However, mere savings may not be enough given the rising inflation and expenses associated with a retired life bereft of any regular income. If you want to retire early, here are some thumb rules.

Assess your expenses

How much money you will need every month once you retire is more important than how much you spend now.

Start with essential expenses on food, rent, clothing, transportation, insurance premiums and money needed for other utilities. Do not ignore loans that you may have taken, check your credit card debt and work towards paying off all your bills, debts, and loans. It is essential to plan for a debt-free retirement, which means no accumulation of bad debts or saving enough to repay off the long-term loans even after you retire. Also, a lot depends on how early you wish to retire. If you will still have dependent children after you retire, you must allocate a sum of money to pay towards premiums in life insurance policies and continuing health insurance plans.

Money requirement

Now that you have budgeted your post-retirement expenses, focus on how much money you would need to retire. There are no fixed ways to evaluate this though the thumb rule is to set aside at least 25-30 times your budgeted yearly expenses on retirement along with enough cash to cover at least a year’s worth of expenses. Estimating your needs when you’re 40 or 50 years would require you to find out how inflation affects daily living costs. For example, your monthly expenses are 20,000 at present that translate to 2,40,000 every year. Dividing 2,40,000 by four per cent equals to 60,00,000 per annum. This means that you would need 60, 00,000 every year after you have retired.

Save and invest regularly

Financial planning is futile without timely action. You must start saving early to ensure enough funds when you retire.

However, saving alone will not help and, hence, you must choose from among the different investment options -- shares, mutual funds, exchange-traded funds, sovereign gold bonds, crypto currencies, real estate, fixed deposits, recurring deposit accounts, post office schemes, corporate bonds -- available to allocate your money in a way that yields you enough funds when required. The idea is to see your money grow.

Active management of investments

Investing money and then forgetting it is a deadly financial sin. Track your investments and check if your portfolio is diversified enough. For example, you can put your money in high-performing equity mutual funds or stocks if you are willing to take risks and wish to accumulate a large corpus after 15-20 years.

However, if you are a conservative investor and cannot handle the turbulent nature of the stock movement, approach debt funds that earn higher returns than bank deposits sans the risk of losing your investments. The real estate market is expected to boom with the market now opening to new business and employment opportunities post the Covid-19 pandemic. With home loan rates at an all-time low, it would make sense to invest in property now to sell it at a higher price later. To save on the money spent on payment of medical bills and expenses associated with both pre-and post-hospitalisation, you must buy proper health insurance that will take care of your treatment expenditure.

Last, but not least, never underestimate the importance of a term insurance plan, which would ensure financial security for your dependents after your death. Choose a term cover amount after considering your nominees’ financial needs and your debts, if any. This is especially true if you have taken a loan that must then be taken care of by your nominees.

Personal Finance is a weekly feature that aims to provide our readers pertinent and helpful financial information

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Friday, October 22, 2021