If you are in your early thirties, it is likely that the idea of retiring at a young age has entered your thoughts, especially after a challenging day at work.
However, the majority of individuals will need to continue working well into their later years, typically until they reach the age of 60. This is primarily because many people, whether it be due to external factors or a lack of financial discipline, are unable to achieve a sufficient savings rate required for early retirement.
Although the concept of retiring early may seem appealing, it is actually quite challenging.
Consider this example, and the concept will become clear.
Imagine you are 32 years old and dissatisfied with your current employment. Although you desire to resign immediately, you recognize the importance of financial stability and set a goal to achieve financial independence by the age of 50, allowing you the possibility of early retirement.
You currently have 18 years to accumulate savings for your retirement. However, with increasing life expectancy, it is likely that you will live to be between 85 and 90 years old, or even longer. Therefore, if you choose to retire at the age of 50, you will need to ensure that your financial resources can sustain you for an extended period of 40 years during your retirement, from age 50 to 90.
To achieve early retirement, it is necessary to engage in a straightforward retirement planning exercise. Assuming current annual expenses of Rs 7.5 lakh at age 32, an average inflation rate of 6 percent over the years, and post-retirement returns of 7-8 percent, with about 60-40 equity-debt portfolio during accumulation years, it would be required to have close to Rs 6 crore-7 crore at the age of 50.
However, one must question whether it is genuinely sufficient.
Here are several considerations to bear in mind, as life often does not unfold as seamlessly as mathematical equations and spreadsheets might suggest.
- Prioritize saving for early retirement, but remember that you should also save separately for your children’s future, purchase a house, and other financial goals. The funds needed for these objectives will be on top of your retirement savings.
- Periodic significant expenses, such as home repairs, car purchases, and the like, will arise every few years. These expenses, which are not part of regular spending, can be costly and have a significant impact on savings when they occur. Therefore, it is important to plan for these expenses if early retirement is a goal.
- Given that you will likely live for several decades after retiring at the age of 50, it is advisable to adopt a conservative approach when making return assumptions. This will help ensure that your savings will be sufficient to last you throughout your lifetime. Failing to do so may result in the unsettling situation of outliving your financial resources.
- It is a common desire for individuals to have a long life. However, achieving longevity often necessitates financial resources. Therefore, it is crucial to prepare for an extended lifespan, especially if your spouse is significantly younger and is likely to outlive you.
- Ensure that you have health insurance as you are intelligent. However, it is advisable to set aside some funds for unforeseen medical expenses that may not be covered by your insurance in the future. It is wise to have a medical contingency fund prepared for such situations.
- Be aware of the potential risks associated with the Sequence-of-Return-Risk. Many individuals lack knowledge or awareness of this concept. However, if not properly addressed and luck does not favor you, your retirement strategy could be compromised.
- One of the greatest dangers lies in the unknown-unknowns. You only have one opportunity to save adequately for the Retire@50 objective. It is crucial to have confidence in the figures. If you make a mistake (and save too little, resulting in an insufficient retirement fund) and only realize it several years after retiring, there will be no way to rectify the situation as you probably won’t be able to find employment. Therefore, it is essential to ensure the accuracy of the (early) retirement figures. If you are unable to do so, seek assistance from investment advisors.
After everything has been considered, achieving early retirement is an appealing objective for numerous individuals, particularly young people who have the opportunity to pursue it. However, this will necessitate substantial savings and (learn about this strategy to expedite early retirement). Additionally, it is important not to overlook the enjoyment of the journey while striving to reach the destination swiftly.
It is essential to prioritize saving and investing in order to achieve financial independence in a timely manner; however, one must exercise caution and avoid excessive sacrifices in the present for the sake of an uncertain future. Accumulating substantial wealth by the age of 50, with the intention of retiring early, should not come at the cost of missing out on meaningful experiences that foster nostalgia in life. Would you not agree?
