Many of us would want an early retirement with a nice house, fancy car and other luxuries. But most of us who have decent salaries believe in living for the day. Planning for an early retirement requires discipline in saving & investment, self study and time.
Why you should start planning for retirement at a very young age:
1. Increased life expectancy
2. Medical emergencies in old age
3. Nuclear families.
4. No government sponsored pension plan:
5. Job hopping & instability
6. Inflation
Start early to gain from the power of compounding as well as aim for a higher return.
Let”s take an example. Say X is 28 years and wants to retire at 60. S/he has 32 years to go. If s/he starts investing Rs 1,500 per month for the next 30 years, then at the rate of 15% (assuming s/he is doing a systematic investment plan in equity mutual funds) s/he will have a corpus of Rs 1.03 crore.
Whereas, at 50 you decide to start investing then to have a corpus of Rs one crore, you will require an investment of Rs 41,500 per month!
Therefore, in twenties, responsibilities are less, time is with us.
Focus on the financial goals in a systematic manner:
1. Emergency goals : liquid funds, Debt Mutual Fund
2. Retirement goals: Mutual funds, Equity & Balance Funds
3. Health goals : Health insurance & Term insurance
4. Growth goals & Dreams: Diversified Mutual Funds with proper asset allocation.
To get financially free by 45:
• Track current monthly expenses. Post marriage, it could be much higher.
• Add annual expenses like insurance premiums, loan repayment, taxes, car maintenance, vacation etc.
• Also put a rough amount against your planned milestones like buying a car/house/marriage/kids education.
• Learn about personal finance concepts, asset allocation, equity and debt market investing.
• Invest in instruments that can beat inflation post tax (Mutual funds, real estate etc.).
• Start investing in Equity mutual funds monthly via SIP
• Keep reviewing and adjusting your asset allocation regularly (may be yearly) and “Top Up “that sip without fail, Take help of an expert and spend quality time with him/her to understand.
• Pension plans is another lucrative option
A word of caution ~ Contribute every year to this fund; you might want to skip a year”s contribution thinking that skipping a year will not make much of a difference. You might be wrong. ~ Systematic investment instills discipline and this is a key to accumulating a bigger corpus.
How much would you require at retirement
Calculate with your current expenditure and add Inflation. Post retirement you will live for another 25/30 years, (Life expectancy is 85 years) add for those many years and the amount you get should be ideally the retirement corpus. PF/Gratuity, FD/PPF etc may not be sufficient, so need to work on this gap and best way is Mutual Funds and SIP.
Retirement corpus is:
~ Your current age
~ Expected age of retirement
~ Life expectancy
~ Years after retirement
~ Current earnings
~ Expected annual growth (in percentage) in income
~ Annual income at retirement age
~ Rate of return on retirement corpus (in percentage)
~ Inflation rate (percentage)
~ Inflation adjusted rate of return/Real rate of return (in percentage)
Thus to retire early you must
1) maximize earnings
2) invest wisely
3) reduce spending and
4) minimize taxes
5) carefully determine how much you need to live off
6) choose an adequate place to retire.
Empower@alpashah.in
