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How to Plan for Early Retirement?

How to Plan for Early Retirement?

One shouldn't simply retire from something; one should have something to retire to. That's where the importance of an early retirement plan makes sense. After all, everyone wants to be financially independent even after signing off from work life permanently.

Leaving the work life before the appropriate retirement age is often a challenge for many. However, there are certain times when early retirement doesn't come as planned. Whether it's an accidental disability injury or something else, an individual may be under excessive pressure without the right financial plan.

Thus, an early retirement plan is crucial, especially for today's salaried millennials. This post offers the best suggestions to help you manage your finances and personal life accordingly.

Understand What's Your Target for Your Retirement Age

Always remember, there is no one-size-fits-all approach to early retirement. Hence, creating a customized strategy depends on your circumstances and risk tolerance, which is critical. Your lifestyle also plays a crucial factor in creating a financially secure retirement. Be persistent and committed to taking the right steps toward creating a plan for early retirement. On that note, the following are the things you should consider while planning for an early retirement.

While planning for retirement, you need to set a target and calculate the age at which you would want to live a retired life. You may want to opt for voluntary retirement at the age of 45 or 50. But you need to have enough funds to live a retired life ahead.

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Comprehend How Much Expense You Need after Retirement

Without understanding how much expense you need during your retirement; would you be able to use the fund effectively? The answer is a sheer no. Once you retire at an early age with a lump sum amount of money, you need to have a proper understanding of the expenses. So, begin by noting down the expenditure for most necessary things, like groceries, utilities, medical emergencies, etc.

Having multiple debts during retirement may also affect your finances. So, ensure that you enter a debt-free life after retirement. This means you should not have any mortgage, outstanding medical bills, or credit card balance. If you have recently taken a personal loan, ensure to complete your repayments before you retire. Whatever the situation is, you should never have debt during your retirement.

You can start saving for expenses other than necessities like travel, hobbies, or new pursuits like entrepreneurship or something else.

Don't Forget to Calculate Your Retirement Corpus

After establishing a goal, calculating your retirement corpus is your next step. Note that this corpus must be large enough to generate the annual income that covers your finances after your work life ends during retirement. You can calculate your retirement corpus by assessing these parameters:

  • Your lifestyle during retirement
  • An estimated lifespan
  • Your expenses after retirement

The best way to do so is by targeting a retirement corpus of around 25–30 times the expected expenses annually. For instance, suppose your estimated annual expenses during retirement are Rs. 15 lakhs. So, you must have a corpus of Rs. 2 to 3 crores.

Additionally, consider factors like inflation, which can erode the purchasing power of your corpus over time. Assuming an inflation rate of 5%, you'll need to adjust your target corpus accordingly to maintain the same standard of living.

Life Expectancy

While no one can predict the future, anticipating how many years you will live helps you with an early retirement plan. So, the next step here includes calculating life expectancy for retirement planning. It helps you make the right financial choices for your future. Once you are clear about life expectancy, you can better estimate the amount of funds you have after retirement. This calculation usually involves various factors like:

  • Current age
  • Your health status
  • Family medical history
  • Lifestyle choices
  • Other socio-economic aspects

Accurately estimating this parameter can help you get a better insight into your retirement funds. Without a careful plan about life expectancy, you may be unable to understand your retirement needs. As a result, you may experience financial issues in the future. So, to ensure that you enjoy a secure retirement despite unforeseen expenses, it's crucial to consider life expectancy.

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Save the Most During Work life

Once you know your corpus, it's time to focus on maximizing your savings. The following are some strategies you can consider:

1. Follow a Budget Plan

The more you save, the faster you reach the retirement corpus objective. So, your aim should be to save at least 25–40 percent of your salary monthly. You may reduce unnecessary expenses. Always have a budget and never go beyond that amount.

2. Build Wealth in the Right Ways

The best way to build wealth is by investing in the right ways. That way, you can achieve your retirement goal accordingly. So, you can consider investing in options like equity, bonds, real estate, etc. It's always better to discuss investment opportunities with a competent financial advisor to make your retirement days rewarding.

3. Get Tax Benefits

Those tax-saving investment choices offered in India can help you create a strong early retirement plan. You may consider these options:

  • PPF or Public Provident Fund
  • ELSS or Equity Linked Savings Schemes
  • NPS or National Pension System

Such investments help you save on taxes and improve your retirement corpus.

4. An Additional Source of Income

Passive income can be an excellent consideration for people who want to enjoy a healthy retirement life. There are so many certified platforms offering freelancing remote jobs. So, if you have time outside your work life (and if your office allows freelancing outside), you can consider freelancing or a side business.

Additional sources of income can be great for accelerating your progress toward successful retirement days. What it does is offer a financial cushion so that you can financially deal with the issues that arise during retirement with ease.

Considering an Insurance Policy

Planning for medical expenses is critical for a more enjoyable retirement life ahead. In a country like India, public healthcare might not completely cover your basic healthcare needs. So, you may need an insurance policy for you and your family.

If you are the sole breadwinner in your family, you can look for policies that cover your spouse and children. Remember that comprehensive coverage includes medications, hospitalisation, and other treatments. In addition, you must also determine the cost of assisted living.

One quick note: You should always regularly review the health insurance coverage and adjust accordingly based on the changes required.

Thus, investing in the right medical policy helps you secure your financial life in the future.

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Think of a Job after Retirement

They say an empty head is a devil's workshop. The same might be applied to your life after retirement. You may enjoy the leisure, but someone who works for 10 to 12 hours a day may face psychological challenges post-retirement.

Getting a job after retirement might sound funny, but it actually helps you both mentally and financially. The following are the types of passive income sources you may consider:

  • Business – If you have a business idea or a passion project, early retirement may give you an excellent opportunity to turn it into a venture. With careful planning, your entrepreneurial endeavours could offer financial security.
  • Gig economy opportunities – Part-time employment, or gig economy helps you earn additional income for retirees while maintaining finance and flexibility. You can consider part-time jobs.
  • Teaching – Do you know how to sing, play an instrument, or paint? You can utilise your retirement life by pursuing teaching. If you have been in the educational sector for years, you may also take online coaching classes in your specialised subject.
  • Investing in Real Estate – How about renting a spare space in your house? This can also generate income after retirement.

So, these are some of the passive income sources you can consider after retirement.

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A Concluding Note

Retirement is a milestone that most people look forward to, but the traditional retirement age of 60 or 65 may not align with everyone's goals and aspirations. Early retirement becomes exciting only for those who dream of financial freedom and the ability to pursue their passions at an earlier age. However, achieving this goal requires careful planning. Hopefully, with the things mentioned above, you can strategically create your early retirement plan.

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