How to Save for Early Retirement

Most people cherish the dream to be financially independent and have a relaxed and enjoyable life in their golden years. This requires substantial savings and a good retirement plan. During your working life, you can meet your regular expenses with your earnings, but post retirement, you would need to pay for your expenses for at least 30-35 years while there would be no source of regular earnings.

Retirement planning is also important because the average life expectancy in India continues to rise, it is impractical to work forever, and you may have to quit working due to health or other concerns at some point. Besides, medical expenses, which will form a significant portion of your expenses during retirement, are on the rise.

In order to understand the importance of retirement planning, consider this example: a 30-year-old with current monthly expenses of Rs. 50,000 would need about Rs. 2,87,174 per month to meet his expenses when he is 60 years old (considering inflation at 6%).

Let us consider the example of Ashish, who is a 32 year old architect. He is keen on developing his business to a level where he does not need to be extremely hands on, and wants an early retirement plan to assist with this goal. He is faced with the question of how to retire early and travel the less frequented parts of the Earth. He needs an early retirement plan which would allow him to bolster his savings and develop a full-fledged business in the next decade. This would then free up his time to enjoy his travels, with minimal or no disruptions from his work. If you are also keen on knowing how to retire early to fulfil other life goals, here is everything you need to know about this very timely topic

Those planning to retire in their 60's would require around 60-80% of their pre-retirement monthly income during retirement. However, for early retirement, that figure is much higher.

Using a retirement calculator can give you a fair idea about how much money you need to save each month to fund a suitable retirement income. As an example, a 25-year old, who would like retire early at the age of 40 years and would like to have monthly income of Rs. 50,000 for 40 years, would need to save about Rs. 45,500 per month for 15 years assuming a 6% inflation, 12% returns and no current retirement savings.

The general rule of thumb that a retirement calculator follows is that you multiply your projected annual expenses with 30. This provides you with a retirement benchmark savings amount from which you can withdraw around 4% each year. Your retirement kitty needs to generate returns at a substantially higher rate than 4% (say 7%) in order for you to keep living off this corpus. As an example, if you plan to generate Rs. 4 lakh of investment income each year, you would need to save up nearly Rs. 1 crore by the time you reach your desired age of retirement. If you are a 25-year-old, who earns Rs. 5,00,000 a year and you can save half that amount for 15 years and garner a modest 7% annual return on that savings, Rs. 2.5 lakh invested per year would grow to nearly Rs. 62.8 lakh.

In order to save for early retirement, you need aggressive growth in your current investments. Using asset allocation, you need to carry out distribution of your investments across equity and debt so that you can derive growth (through equity investments) during your pre-retirement phase and income (through debt investments) during your post-retirement years. Mutual funds are an easy route to access the stock markets and debt securities. Equity funds offer inflation-beating returns, professional fund management and systematic investment plans (SIP) for automatically investing money each month. Debt funds offer a variety of rated debt securities across different maturity periods and interest rates. The debt fund manager keeps a close track of interest rate movements and ratings of debt paper thereby providing you with professional management of your debt investments.

How much money you need to save for retirement is contingent on your own personal needs and lifestyle; however, by using a retirement calculator, you can get a figure that would be critical in providing you with a monthly income for the rest of your life post retirement.

Now that you have a robust insight into the various facets that go into the creation of an efficient early retirement strategy, you have the time and energy to focus on charting the roadmap towards success or, you guessed it right, early retirement. Remember, the most important thing to do is start early, as this gives you the time to shore up your reserves and take a few risks along the way. Happy early retirement!

An investor education initiative by Edelweiss Mutual Fund

All Mutual Fund Investors have to go through a one-time KYC process. Investors should deal only with Registered Mutual Fund (RMF). For more info on KYC, RMF and procedure to lodge/redress any complaints, visit - https://www.edelweissmf.com/kyc-norms  

MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS. READ ALL SCHEME-RELATED DOCUMENTS CAREFULLY