An easy answer to a difficult question - Careful Financial Planning
May 16, 2017
I am sure you would have thought about that question at-least once. And with increasing work pressure at office and little time for yourself, this question rears its head more often than not. Now the main thing is -
"Do you just want to keep thinking about that question or want to take some constructive action?"
If you are actually among those who want to get out of the corporate rut and enjoy the life the way you want without having to worry about family expenses, then read on.
Answer to the question "When Can I retire" depends on both qualitative and quantitative factors. While qualitative factors are more personal, we can easily break down quantitative factors for everyone to use. So let's begin.
Determine Your Annual Expenses
The first step to early retirement planning is to decide whether you would want to maintain the same lifestyle post retirement as you are having now or change it. If the lifestyle would remain same, then next step is to determine your annual expenses. Until and Unless all our expenses are accounted for, we will never be able to plan for it. Make sure to jot down every last small expense which you incur. You will be surprised to see that small expenses make quite a sizeable chunk of your monthly expenditure.
If tracking monthly expenses is not your cup of tea then use any of the mobile apps out there in the market. But the main point is to track every small expense.
Once you are ready with your monthly expenses, add annual expenses like insurance premiums, vacation expenses, car maintenance etc. I hope you are medically covered. If not then do that now! Post retirement, medical expenses shoots exponentially and at that point in time, medical insurance really comes in handy.
If you feel that your lifestyle post retirement would be way different than current, then put down expenses as per the new lifestyle. Don't hesitate to cut corners and reduce the monthly expense as this will form the basis for entire retirement plan.
Inflation is the beast
We all know how inflation spoils everything and true to its nature, it will jack up the monthly expense by the time we plan to retire. Assuming annual inflation to be anywhere between 6%-8%, you will be shocked to see how much you will need on a monthly basis to sustain your current lifestyle post retirement.
With annual expenses in place and inflation impact on it, now you will have the answer to the question - "How much money do i need to retire?" Here is one early retirement excel calculator which does it for you. All you have to do is to plug in the values.
At this step, you have your total expenses and now it's time to plan for it. At broad level, 2 concepts are worth mentioning here - Savings Rate and Return on Investment
How much is your Savings Rate?
How much of your monthly salary do you save? 20%, 30% or 50%?
If your monthly savings rate is anything less than 30%, then you should try to save more. I know one general rule can't be applied to all as expenses would differ person to person but still it is advisable to save around 30%.
What's your ROI for your Savings?
Next step in retirement planning is to put your hard earned savings to some use. You wouldn't want to leave it in your savings bank account to earn paltry 4-6% interest and that too taxable.
Assuming inflation grows at 6-8% annually, you would want to grow your investments at-least couple of percent points higher post tax. What do you do then? Look out for such financial instruments as per your risk profile. Traditionally mutual funds have delivered that sort of returns over long periods (10 yrs+). But do invest in any instrument only after consulting with your financial advisor.
Tying it all together
So you have an idea about how much money you would need post retirement but now what? The next step is to find out how much you need to actually save every month (with an assumption for ROI) to achieve your target.
Here is an early retirement planning template which you can use to find out how much money you need to save every month to reach to your goal of early retirement.
So when are you retiring?
Last Notes: Though it looks complicated and difficult but planning for (early) retirement is very simple. One needs to be honest with oneself and be financial disciplined.