Early retirement means achieving financial independence early in life so that you can focus on attaining other important goals. The ‘FIRE movement’ or Financial Independence Retire Early has been the mantra that millions have been following worldwide.
Like any of the choices in life, early retirement involves trade-offs. Before you are ready to take the plunge, it’s important to consider the pros and cons of retiring early. Early retirement comes with good health, agility, and stamina, giving you more time to travel. It also provides you with the opportunity to focus on nurturing personal relationships.
Before you are ready to take the plunge, it is necessary to understand the financial implications of retiring early. Early retirement means a more substantial retirement corpus to fund those extra years of retirement. For instance, if you decide to retire at 50 instead of 65 and have a life expectancy of 80, you will need to set aside a corpus to fund 30 years of retirement instead of just 15.
If you want to retire early, use these 5 steps to make this possible:
- Cut back on your expenses: You need to compartmentalize your expenditure into necessities, comforts, and luxuries. Necessities are sustenance expenditures you can’t do without. While expenses on comforts may be marginally reduced, you could cut back on luxury-based expenses and earmark these savings towards your retirement corpus. Cutting on your spending is much more powerful than increasing your income as it permanently decreases the amount you’ll need every month. Furthermore, it’s imperative to get rid of any form of debt (personal loans, car loans, home loans, etc.) before you retire.
- Estimate your expenses during retirement: You need to have a clear understanding of how much money you will need during your retirement years. A simple approach is to take your current monthly expenses and deduct expenditures like conveyance costs that will reduce during retirement. Add the expected rise in age-related healthcare expenses, higher travel-related expenses (if you want to travel during retirement), etc. You now have a rough estimate of your monthly expenses. It’s important to factor in inflation to estimate future spending needs. A retirement calculator is a simple tool available online to help determine your retirement corpus by factoring in inflation.
- Estimate your total saving needs: If you want to retire early, start saving today. The question is, how much money do you actually need to retire? You could use a basic rule of thumb of saving about 25 times your current annual spending for your retirement kitty. For instance, if you currently spend Rs 6 lakh per year, you will need a retirement corpus of Rs. 1.5 crore (25 times of Rs. 6 lakh) at the beginning of your retirement.
- Grow your money: Retiring early not only means that you have a shorter period to earn money, but also that there’s going to be a longer period when you’re not working and only have your savings to support you. Seeking professional guidance and putting your retirement investment in a balanced portfolio with a tilt towards equity is advisable.
- Have a plan and stick to it: Planning is the most essential component for early retirement. Not only do you need a foolproof plan, but also have to stick to it if you want a comfortable and hassle-free retirement.
The opportunity to spend decades of your life in leisure is very tempting, but it takes planning and preparation to make your retirement period a happy one. In other words, proper retirement planning is the key to make your golden years joyful.