10 Tips on How to Plan for Early Retirement
Many of us might be planning to quit job or close a business or pursue hobbies (without expecting money) by taking early retirement. However, early retirement is not that easy unless you plan them well. You need to be ready with a few things. Certain things would not be in your control. In this article we would provide some tips on how you can plan for early retirement.
What does early retirement mean?
While retirement age is 58 years, many are going on early retirement of 5 years or 10 years or even 20 years. Means, people want to retire at 40 years or 45 years or 50 years of age itself.
10 Tips on How to Plan for Early Retirement
Here are major pointers which can help you to plan for early retirement. This list is not comprehensive, however, can provide clarity.
#1 – Decide what you intend to do
One of my friends Mr. Srinivas indicated he wanted to have an early retirement at 45 years of age. While I appreciated his decision, I asked him what he is gonna do after retirement life. He said “I have not yet planned”.
This is not the biggest mistake one would do when they plan for early retirement. You want to retire early, but you do not know what you are going to do after retirement? One can pursue their hobbies. They can try to achieve whatever they aimed, but could not do in their life. They can try creating Vlogs, freelance service in the areas they are passionate about, wealth management tips, mentor people in the area which they are expertise etc., There are Several Ways where you can earn during your leisure time.
I know many people personally who planned early retirement and worked as consultants in advising corporates on how these corporates can scale-up both in terms of business and also in reducing attrition in the company.
#2 – Take Sabbatical / Leave for a few months
Last year, one of my colleague was thinking of resigning as she wanted a break. Just before she put the resignation, we had to casual talk. Taking a break is good, but the approach could be different. Based on my advice, she approached HR and had 6 month sabbatical leave. Those 6 months, she had fun and frustration both. Finally, she agreed that she wanted a small break and not a long break.
One should decide what kind of break they are looking for. Planning for early retirement is good, but, one should experiment by taking couple of months leave or with sabbatical leave of 6 months to 1 year. This is like testing yourself whether you are ready for early retirement or not.
#3 – You don’t get regular income after early retirement
Many individuals would estimate how much income they might get by doing adhoc / hobbies / freelancing services etc., However this is not regular income. It such income can fluctuate.
I still remember one of my friends who took early retirement and had insurance blog where he used to earn income through advertisement as well as selling insurance policies online. He used to earn anywhere between 1 lac to 1.5 lacs per month till couple of year back from where he used to manage expenses. However, these days he earns some peanuts. One should not expect to have regular income from such activities.
#4 – Expenses would continue to rise
You might be spending a specific amount of expenses now. However post retirement, you do not have control over such expenses. Check the latest inflation rate in the US which has crossed 8%. You should understand that you do not have control on your monthly expenses. An increase of 6% to 9% of yearly expenses should be considered while you estimate your future expenses.
#5 – Don’t expect high returns from fixed income
Till 2020, Bank FD’s offered 6% to 7.5% returns. In the last 2 years, fixed income options including bank FDs or debt funds have given 4% to 5% returns. Don’t expect high returns from fixed income options in future. Countries like Denmark, Japan, Sweden and Switzerland have negative interest rates i.e. Investors need to pay money to keep their money in banks in these countries. While it might take some time for such situation to arise in India, one should expect that FD rates would decline gradually in the coming years.
#6 – Invest in equity to beat inflation
If you have accumulated some money and investing in non equity options, then be ready that your accumulated money would reduce at a higher pace compared to the inflation rate. The only way to have returns that beat inflation is to invest in equity. However, investment in equity comes with risk. If you are thinking of early retirement, consider taking risks and invest in equity.
#7 – Don’t invest in equity and expect to withdraw regularly
This is the biggest blunder mistake investors make. They plan for early retirement, they feel they can still take risks, invest in equity and start withdrawing some money on a regular basis. Investment in equity is a long term game. Don’t play in the short term. You would lose money. Alternatively, you can try for Some of the Good Systematic Withdrawal Plans in Mutual Funds.
#7 – Two bucket strategy works very well
We discussed about 2 bucket strategy earlier.
i) Based on whatever accumulated amount, one can divide this into 3 parts. Two parts can be invested in equity for over 7 years. Since equity generates 10% returns, your investment would get doubled in 7 and odd years.
ii) One third of the amount can be withdrawn for over a 7 year period. One can invest this in simple FD or simple short term debt fund.
iii) Repeat step-1 every 7 years. Means the investment amount would always double for the rest of your life.
This 2 bucket strategy works well as you are not touching the equity investment for 7+ years which is required to grow.
#8 – Have you considered all your financial goals
Don’t be in a hurry and go for early retirement. Consider all your financial goals as part of your plan. It could be children education, foreign education for children, foreign vacations in the future, buying a dream home etc. All these come with a cost. Don’t go for early retirement and then start thinking about these things.
#9 – Don’t underestimate skyrocketing medical expenses
Mr. Rajesh wanted to have an early retirement at the age of 45 years. He is physically fit when he had an early retirement plan. However, after a couple of years, he had serious health problems and his medical insurance did not support them. He had to spend lacs of rupees on medical expenses which he never planned. While it is impossible to estimate the skyrocketing medical expenses, there should be a health insurance plan + some amount allocated towards it.
#10 – You need to take your family support too
After you have considered all these pointers, consider taking your family buy-in too. Unless they support you, early retirement is not going to be that easy. Once you explain your plans, how you would manage family expenses and what you intend to do after your early retirement, things can be clear to your family too.
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