At the beginning of your career, it may seem like a stretch to start planning for your retirement. However, if you plan to retire early or wish to live a secure and relaxed lifestyle after retirement, it becomes crucial to start cultivating healthy habits of savings and investment from the beginning. Here are 9 tips that you can follow to help you achieve your goal of retiring early.
1. Start investing early to take advantage of the power of compounding
It is important to start saving and investing early, especially if you plan to retire early. While investing, it is better to invest in securities that provide compound interest on your investments.
Let us take an example to see the power of compounding.
Consider a Mr. A, who starts investing at the age of 25 and Mr. B, who starts investing at the age of 35.
Both individuals have a certain investment scheme in their portfolio that requires them to pay Rs. 12,000 every year. Interest is compounded at 8% per annum, which they keep investing until they seek retirement at the age of 60. The following will be their earnings:
| YEAR | INDIVIDUAL A’S EARNINGS (In Rs. ) | INDIVIDUAL B’S EARNINGS (In Rs.) |
| YEAR 1 | 12,960.00 | – |
| YEAR 2 | 26,956.80 | – |
| YEAR 3 | 42,073.34 | – |
| YEAR 10 | 1,87,745.80 | 12,960 |
| YEAR 11 | 2,15,725.50 | 26,956.80 |
| YEAR 12 | 2,45,943.60 | 42,073.34 |
| YEAR 34 | 20,55,802.00 | 9,47,453.00 |
| YEAR 35 | 22,33,226.00 | 10,26,209.00 |
| YEAR 36 (Retirement age for both individuals turn 60) | 24,24,844.00 |
11,32,066.00 |
As you can see, a mere ten-year difference has yielded a huge difference of over Rs. 12 lakh between the returns of the individuals. This is because of the power of compounding. Here, the interest for the successive year is calculated based on the principal and the interest earned on it.
2. Create a healthy investment plan
Before you start investing for the long term, it is extremely crucial to define your duration of investment, risk appetite, and the amount you wish to invest. Determine how you plan to employ your returns. Formulate a plan which takes into account all these factors and stick to it. This shall help you reap the maximum returns, knowing that you are investing in the best possible places.
To further reduce your risk and maximise your returns, learn the importance of portfolio diversification. Read more on how to employ this strategy in our blog here.
3. Avoid early withdrawal
Avoid taking debts and try to not take money out of your retirement account or investments. Early withdrawal from retirement accounts comes with a great deal of tax liabilities. A premature withdrawal from investments may even attract penalties, while also causing you to miss out on long-term gains.
4. Set up alternative streams of income
It is to your benefit if you set up alternative sources of income. It may be rental income from your real estate property or earnings from a side hustle that you enjoy. This is done to add to your salary and to fuel your total income. It helps you set aside more savings for your end goal.
5. Get health insurance and set up a contingency fund
It is good to be prepared to deal with critical illness and other ailments that are bound to arise. Medical expenses are high and can deplete a major chunk of your wealth if you do not have insurance.
A contingency fund can also be used for any unforeseen circumstances, like loss of employment, house/vehicle repairs, and so on. Typically, a contingency fund should be worth at least 6 months of expenses or 6 times your basic salary.
6. Make full use of your employee benefits
Many corporate firms provide several benefits to their employees, whether it is offering a discount for the company stocks or matching your contribution for other investment options. Make sure to participate in these schemes to further diversify your portfolio.
7. Invest in plans that result in tax benefits
Paying taxes is your duty as a citizen, however, not understanding all provisions may erode a significant part of the income. Investing in schemes that have tax exemptions and benefits can help in this regard. Some tax-saving investment options include the Public Provident Fund (PPF), Unit Linked Insurance Plans (ULIPs), tax-saver fixed deposits, and so on.
8. Be consistent in your investments
Retiring early means that you will have to save a lot more than an average person. Saving and investment for this is not a one-time thing but requires consistent efforts over a prolonged period of time. Try to increase the amount that you invest every year. Moreover, keep a check on your everyday habits.
Read our blog here to know the top 10 money mistakes that you must avoid.
9. Try to create and follow a budget
It is extremely crucial to set some constraints if you want to grow your savings. Try to stick to a pre-decided budget and monitor your expenses in a disciplined manner. Try to be economical and thrifty. It does not hurt to cut costs whenever possible. Moreover, stay away from any unnecessary expenses If you wish to retire early, you may have to make a number of sacrifices and avoid indulging in needless luxuries for a while. Apart from this, try avoiding debts as much as you can. When you take on debts to pay for a second car or a house, a large portion of your income goes towards EMIs and paying interests. In the long term, this can significantly erode your wealth. Whenever possible, avoid taking debts and try to finance your expenses through other means.
In conclusion
Retiring early sounds like a dream but there is a lot that goes on behind achieving this. You should inculcate a disciplined ritual of budgeting, saving, and investing, while sticking to a financial plan that aligns with your goals. Being mindful of the tips above can help you save better to achieve your goal of retiring early.
Apart from this, always seek help from experts. It gives you a professional perspective of your finances, backed by years of experience and knowledge. TejiMandi is your go to Sebi-Registered Research Analyst when planning an early retirement. Reach out to us for more details.
