5 Signs You’re Ready To Retire Early

According to Nielsen’s Retirement Readiness Survey 2020, commissioned by PGIM India Mutual Fund, the conformist mode of steady employment and retirement age of 60 is becoming more obsolete in India. Following the Financial Independence Retire Early (FIRE) movement in the United States, the early retirement trend in India has gained traction. Despite the prevalent belief that you must retire at the age of 60, it is entirely possible for you to retire earlier. There are numerous advantages to retiring early, and you do not have to work until you are in your 60s. However, before you take the plunge, you must guarantee that you have appropriate retirement resources.

Here are five signs that you are prepared to retire early:

You have no debts.

Paying regular EMIs in retirement can be especially difficult if your retirement income is limited due to your savings and investments. So, before you decide to retire, it is a good idea to pay off all of your debts, such as loans, mortgages, credit card bills, and so on. It’s also worth noting that early retirement isn’t limited to the retirement age. The FIRE movement is also about financial independence and freedom. This is only possible if you are debt-free and owe no money to anyone.

However, if you have certain loans, investigate if you can convert these liabilities into assets. Home loans and student loans, for example, might provide tax benefits and work in your favour. Sections 24 and 80 EE of the Income Tax Act of 1961 allow you to claim tax benefits on the interest on your home loan. A personal or car loan, on the other hand, would not only provide no tax benefits, but will also be a liability to you in retirement.

So, examine your debt from all angles to determine whether it is a problem or an asset. As a result, you can either adhere to your early retirement plan or delay it for a few years until you are entirely debt-free.

You Have Enough Money Saved

According to the PGIM research, the majority of Indians do not have a “retirement fund.” If you want to retire earlier than the standard retirement age, you should save and invest more aggressively because the time horizon is much shorter.

People who retire at 60 usually save for at least 20 to 25 years. If you want to retire in your 40s or 50s, you’ll need to add a few years and plan for a long retirement period that might last 30 to 40 years or more as life expectancy rises. To arrive at a rough figure for your retirement corpus, you must evaluate these aspects and know how long your retirement will continue.

Example

Consider Sam, a 25-year-old who is thinking about retiring at the age of 40. In 2021, his monthly expenses will be Rs. 40,000. Assuming a 6% annual inflation rate, when he turns 40 in 15 years, his monthly expenses will be around Rs. 95,862 in the year 2036. Furthermore, inflation will grow once he retires. As a result, his retirement fund will reflect all of this.

This is how Sam’s monthly expenditure will rise-

40,000 in monthly costs at the age of 25

Inflation is assumed to be 6%.

At the age of 40, the required monthly corpus is 95,862.

At the age of 40, the required yearly corpus is 95,862 x 12 = 11,50,348.

If Sam requires Rs 11.5 Lakh in monthly expenses at the age of 40, this figure is likely to be inflated/increased due to economic inflation until he reaches the age of 90 if he desires to maintain the same lifestyle. As a result, his retirement corpus estimate must incorporate the inflated expenses each year. More information on how to calculate this corpus may be found here.

Keep in mind that no single fixed sum can suit all retirees because it is determined by your health, lifestyle, present savings & liquidity, and other sources of income, among other considerations. Retirement plans can help you meet your savings objectives, but choosing the correct savings and investment product for early retirement is critical. In this scenario, investment programmes such as NPS and mutual funds can assist you in accumulating an appropriate corpus.

Your Medical Expenses Have Been Planned and Sorted

Healthcare costs are the most crucial, yet often overlooked, component of a budget. This is especially true for first-time retirees. One advantage of retiring early is that your health is still on your side. However, this can work against you since it offers you a false sense of ease, leading you to neglect planning for your future medical bills.

To put this in context, the current cost of coronary bypass surgery in India is between Rs. 95,000 to Rs. 4,50,000. Assuming a 10% increase in healthcare costs, this may cost you between Rs. 15,06,994 and Rs. 71,38,392 in 2050. Keep in mind that health-care costs can take up a sizable portion of your retirement savings, so it’s critical to plan for them ahead of time.

If you are currently covered by an employer-sponsored health insurance plan, you should obtain personal coverage as quickly as possible for two reasons. For starters, if you quit your job, your health insurance coverage would most certainly terminate as well. Second, employer-sponsored plans typically provide limited coverage and are not tailored to your specific needs.

Purchasing health insurance early will save you money because premiums are lower for younger people. If your partner is uninsured, consider obtaining a combined insurance plan or a family floater plan that covers your parents, spouse, and children. Furthermore, if you have a family history of critical diseases, a critical illness plan may provide you with additional advantages. So, weigh all of your options and choose the plan that will provide you with the most value. Of course, your previous health history and lifestyle choices will have an impact, but the starting age is the most important determinant.

You Can Support Your Dependent

If your family members rely on you for financial support, you must save independently for their needs. For example, if your children are in school or preparing to enter college, you will require an education fund to support their costs. These will include not just the tuition money, but also travel, necessary expenses, discretionary spending, and course-related equipment such as cameras, laptops, and so on. Another expense you will need to plan for and save for is your children’s wedding.

Many people in India still live in blended households with their parents. Senior parents may require round-the-clock medical attention. Medicines, insurance premiums, long-term care, and other costs can quickly mount up. If your parents reside with you, you must also account for their daily expenses such as food, electricity, groceries, and so on. Furthermore, if your spouse is financially dependent on you, their expenses, insurance fees, and so on will fall on your shoulders as well.

All of these costs should be covered by an early retirement plan in India.

Assume Sam has saved Rs 7.5 Cr for his retirement expenses and has a daughter who wishes to attend Harvard University. In that situation, he will have to stretch his retirement funds even farther to cover his daughter’s educational fees. For the 2019–2020 academic year, the expected cost of attending Harvard University was Rs. 38,87,287.24 (51,925 USD). Assuming a 6% inflation rate, this could be Rs. 83,85,347 in ten years. As a result, Sam’s retirement fund will be adjusted accordingly.

You are prepared to live on a tight budget.

Because it is derived from a regular withdrawal plan from your investments, your retirement income is limited. As a result, you must use it with caution. A budget can assist you in planning withdrawals from savings and investment accounts. However, because your spending are bound to alter after you retire, this budget will be different from your pre-retirement budget.

You will also need to prepare yourself to live on a tight budget and forego certain luxuries. So, based on the worth of your savings or investments, try to create a realistic budget for your retirement. You might begin by developing a methodical monthly/yearly withdrawal strategy.

Many people follow the 4 percent rule, which indicates that you can comfortably withdraw 4% of your savings in your first year of retirement. For example, if you have a Rs. 20 Cr retirement corpus, you can withdraw Rs. 80,00,000 per year. You can then adjust your withdrawals for inflation each year after that. Please keep in mind, however, that this is merely a general guideline that may or may not apply to everyone.

Last Thoughts

Remember, the purpose of this exercise is to get you ready for retirement. Retirement living isn’t about being frugal or simply about having a good time. It is about keeping a modest lifestyle and living and enjoying life with your loved ones without stressing about cash. A successful and joyful retirement awaits you if you plan intelligently today!