Checklist for Early Retirement

Pursuing a life of one’s own choices is a dream for everybody. But this dream is often impossible due to fixed office hours and work pressure, among other issues. One way out is to retire early and live a life from these constraints.

However, one needs sufficient money to do so. If a person starts working at the age of 30, retires at 60, and stays alive till 90, the length of their service and retired life is the same. As such, starting work earlier at the age of say 20 or 25 years provides more time for earning and counter the effect of inflation and higher medical expenses in the post-retirement life. And this is crucial for those wanting to retire early – longer the post-retirement period, greater is the money needed to meet financial requirements. So, the scenario can be different for different people, resulting in a different size of the required retirement corpus.

An inflation-adjusted pension: If a person retires early with a pension, a regular, inflation-adjusted inflow of money will lighten the burden of accumulating a large retirement corpus. If such a person starts another vocation of their choice after retirement, the corpus will become even smaller.

A desired vocation: If a person retires early to pursue a vocation of their choice, the income from it would determine the size of the retirement corpus. The longer and more profitable the vocation, the smaller would be the corpus.

A good life: A large corpus will be most needed by those who want to retire early to have a luxurious life with lots of travel, especially if there is no pension.

So, the need for a retirement corpus is always there. But its size may vary depending on the wants of a person.

Checklist for Early Retirement

For those seeking early retirement, the following factors must be kept in mind:

Good Health insurance Cover: To protect your investments in old age, you need adequate cover to meet health expenses, especially in case of hospitalisation. In case no life-long health care benefit is provided by former employers, getting adequate health insurance coverage is a must.

Post-retirement plans: It is very important to decide beforehand on what you plan to do after retiring early. The post-retirement engagement plan will be instrumental in calculating the amount of money that will be needed and how it will be utilised to maintain your standard of living. If an early retiree plans to have an activity post retirement that brings in some income, then the size of the corpus required at the time of retirement can be smaller. However, if the person intends to live a life that is expenditure heavy, the corpus will need to be much larger.

Adequate Retirement Corpus: To ensure a person can lead a comfortable life after retirement, it’s very necessary to accumulate an adequate retirement corpus before putting an end to work. To meet large post-retirement expenses after a short service life, one needs to start investing early and make heavy investments to build a large corpus. How the corpus is utilised will also be instrumental in deciding the size of the fund.

How to calculate size of retirement corpus needed

Calculating Post-retirement Expenses: One has to first estimate their monthly expenses post retirement. While this can be on the basis of current monthly expenses, inflation means the amount of money needed every month to keep living the same type of life will keep increasing in the future.

For example, assume the current monthly expenditure of a 25-year-old wanting to retire after 25 years (at the age of 50) is Rs 25,000. Assuming no pension or any income and the same expenditure pattern after retirement as now, a constant annual rate of inflation of 5%, the expenditure in the first month after retirement will be just under Rs 85,000 and will keep increasing every month due to inflation and will rise to nearly Rs 6 lakh at the beginning of the 40th year of the retired life, or at the age of 90.

Calculating Retirement Corpus: A person needs a regular source of money to sustain a retired life. If they are not generating an income from a small job, a retirement corpus is needed to produce income in the form of interest or dividend. The factors that determine the size of the corpus are rate of inflation, rate of return on investments that are part of the corpus, post-retirement expenses, and availability of pension or other income.

Assuming no pension or any income and the same expenditure pattern 

after retirement as now, a constant annual rate of inflation of 5%, the money spent in the first month after retirement would be just under Rs 85,000.

Now assume the post-retirement corpus is delivering returns at an annual interest rate of 7%. If life expectancy is set at 90 years, a person must have a sum of money at the time of retirement such that it grows enough every year to last for 40 years. This amounts to around Rs 6.07 crore.

Accumulating Retirement Corpus: To accumulate a large retirement corpus within a limited period before a person retires early, one needs to start investing early in instruments giving sufficiently high returns in the long run. Earlier a person starts saving, the smaller the monthly saving will be.

Note: For the sake of simplicity we have not taken the impact of taxes in these calculations.