Retiring earlier than your actual retirement date could be a refreshing thought. For some early retirement could mean quitting a salaried job in their forties and fifties. However, for all those who choose this option, their personal finances have to be well chalked out for the future.
“A trend that may take shape more in future, is phasing out of work over a period of time and combining work with retirement – to supplement income or just to contribute whilst one can,” said Kulin Patel, Head of Retirement (South Asia), Willis Towers Watson.
Retirement planning can be tough if one is planning to retire early. Here are a few things you should keep in mind while taking the decision:
Longer post-retirement years
If you choose to retire early, you also choose to spend more years in retired life. As a result, a few significant items need to be borne in mind like inflation, post retirement investments and monthly returns on your investments. This also means you will need a monthly pension income for more number of years. For example, Sohan wants to retire at 50 while Rohan wants to retire at 60, in both the cases the life expectancy age was assumed at 75. This shows that Sohan needs monthly income/annuity for 25 years (up to 75 years), while Rohan will need monthly income/annuity for only 15 years (up to 75 years).
Patel said that the impact of inflation needs to be planned for longer. This is a challenge when inflation protected investments/income products are not really available. “Ensure you are able to have your savings last, given you are in retirement phase longer. Keep reviewing your finances in retirement for changes in circumstances and health,” he said.
Financial goals may get affected
When you are planning to retire early, the timing of anticipated benefits or financial goals can get affected as you may have planned for some long-term goals which can cross the early retirement boundary and eventually, you may fall short of funds once you get to retire. This happens when you stop getting your regular income after your retirement.
Harsh Gahlaut, CEO, FinEdge said that the trouble is - the goals of income generation and wealth maximisation are incongruous, as they require fundamentally different asset allocations.
Patel further added that it is important to consider income need. Not all investment maturities/employee benefits may be realised immediately. One needs to consider the timing of these. “The earlier you retire, the more life stage expenditures will need to be funded from your accumulated savings e.g. children’s marriage or education. This needs to be accounted for in the accumulation phase” said Patel.
More savings required in your portfolio
If you are going to work for less time, then you will have less time to accumulate sufficient retirement corpus. With good planning it may be possible to retire early - however, you will need more savings and it needs to last longer. Be ready to review your needs and plans frequently to assess where you are financially before and after your early retirement.
Gahlaut said that in order to build a sizable fund that will suffice to provide an inflation adjusted income for the duration of an extended retirement, one will necessarily need to lean towards growth assets not just during the accumulation phase, but also during the deployment phase. “Early retirees face the daunting task of walking the tightrope between adequate portfolio growth and steady income generation. Excessive speculation in the hope of generating supernormal portfolio growth can potentially lead to severe corpus depletion – often forcing the early retiree out of their retirement,” he said.
Investment risk surges
When you want to get retire early, you start thinking of investing in stocks to gain high returns, which involves high market risk and you may even losses instead of gains. On the other hand, to avoid market risk many people may start saving more in debt instruments, because it safeguards your investments. One has to have a balance between risky investments and debt investment to ensure high returns along with safety and liquidity during your extended retirement period. “Early retirement is tricky because it parallelly reduces your earning years while elongating your corpus consumption period,” added Gahlaut.
Estate planning needs to be eyed
Estate planning or inheritance is critical, irrespective of one’s planned retirement age. However, it has a special significance for early retirees. It’s safe to say that many early retirees will have a dependent partner to support until a fairly old age. “Assuming an early retirement age of 50 and a life expectancy of 75, that’s 25 years of another life for the retiree to support through his or her assets. If the retiree were to die intestate or without a will at an early part of this extended retirement phase, it could result in serious strife for the dependent partner, if their retirement assets were to be subject to inheritance claims and subsequently be divided up. Hence, it’s very important for early retirees to draw up an iron-tight will,” said Gahlaut.