Early Retirement Planning: Here’s How to Go About It

Financial independence, retire early (FIRE) as a movement of sorts have been gaining ground in the past few years. Healthy financial planning and disciplined investing are the two crucial methods through which an individual can successfully fulfil their aspiration to retire early. 

Traditionally, retirement plans often revolve around pensions and Provident Fund (PF) accounts. Investing in mutual fund schemes can offer an alternative avenue to achieve early retirement.

Here, it is important to note that early retirement is not to be considered as retiring from work for those who are in their 40s or 50s. The term relates to building a sufficient corpus with which an individual can be reasonably sure to take care of meeting their financial needs for the rest of their life. 

This sum of money, ideally diversified across various asset classes, needs to be sufficient enough to pay for all essential needs in the absence of an income, and quite importantly, it can provide an individual with the freedom to choose the way they wish to live their life from a financial perspective.

Generally, retirement planning undertaken at the age of 60-65 can emerge to be a daunting task. Often, it could also result in curtailing one’s current lifestyle. However, adopting a strategic approach from a quite early stage of a professional journey is crucial for those aspiring to retire early. 

A few of the factors that an individual is required to consider while planning to retire early include: 

• Current monthly expenses
• Current lifestyle and whether one wishes to improve it
• Money to address emergencies
• Number of years up to retirement
• Current amount of wealth
• Expected inflation and expected returns from the corpus (remember, equity exposure will have a role to play in this)
• Dreams to fulfil in retired life
• Prioritisation of clearing all outstanding debts before retirement and any other expected expenses or pending financial goals

In case of any confusion, one can always reach out to a professional financial advisor to gain better insight related to the target retirement corpus.

Thumb rules for retirement planning:

Rule of 4%: This rule relates to the withdrawal rate from the retirement corpus per annum. For example, in case an individual has a retirement corpus of Rs 4 crore, then as per the rule of 4%, it may be ideal to withdraw up to Rs 16 lakh a year (0.04 x 4,00,00,000 = 16,00,000), which works out to a monthly withdrawal of Rs 1.33 lakh. 

Rule of 25: As per this rule, an individual may require a retirement corpus, which is 25 times their yearly expenses at the time of retirement. Notably, the rule of 25 is the inverse of the rule of 4%.

For any investor aspiring to retire early, it is crucial to strike a balance between one’s current lifestyle and saving for the future. In case one is planning for an early retirement, they may opt to be conservative and maintain a sufficient enough buffer while estimating their retirement corpus.

Rule of 72: In this case, divide 72 by the expected annual rate of return to estimate how many years it will take for an individual’s investments to double in value.

It is important to note that the aforementioned rules are suitable for providing an estimate and offer no guarantee or assurance related to an accurate retirement corpus. Therefore, investors should reach out to seek professional advice before making any financial decisions.