Investing Guide: How to begin planning for an early retirement?

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How to begin planning for an early retirement?

Retirement is like a marathon, not a sprint. You need consistent preparation over a period of time to reach the finish line comfortably. And the mantra lies in starting earlier! Retirement seems like a distant future, so most people are ignorant of it.  

But the early start gives an upper edge to your money, thanks to the power of compound interest! Compound interest is when your earnings start earning their own earnings. It's like a snowball rolling downhill - it gets bigger and bigger the longer it goes.

Compound Interest is your friend in retirement planning!

The headstart in retirement planning gives more time for your money to compound. This means that even if you invest a few bucks each month, it will grow into a huge lump sum over time.

For example, let's say you start investing Rs 1000 per month at age 25. And you earn a 12% annual return on your investments. So by the time you retire at age 65, you will have over Rs 1,18,82,420! But if you wait until age 35 to start investing, you'll need to save over Rs 3000 per month to reach the same goal.

Reasons why you should plan your retirement early

Recovery from Market Downturns

The stock market goes up and down over time. It has constant fluctuations. But you don't have to be on pins and needles since these downturns are temporary. And the market will eventually rebound. But a downturn near your retirement age might be a huge blow. Additionally, you will need quite some time to recover your losses. This is why it's important to start quickly and be the early bird! It gives you time to ride out the market's ups and downs.

Flexibility & Peace of Mind

When you start saving for retirement early, you have more flexibility to change your plan as needed. For example, one fine day you lose your job or have unexpected expenses. You can reduce your contributions for a while without throwing off your entire retirement plan.

When you know that you're on track to reach your retirement goals, you can take a chill pill! You can relax and enjoy your life more. You won't have to worry about running out of money in retirement. And you can focus on the things you love to do.

How Do You Start Saving for Retirement?

Set an investment goal: How much money do you want to have saved by the time you retire? Just saving money doesn't work, you need to invest it to grow your nest egg. So create a plan to reach it. Your plan should have a healthy proportionate mix of investment strategies like stock investing, mutual funds, ETFs, gold, or even bonds. 

Suppose Mr. Kevin earns Rs 100,000 per month and has anywhere between Rs 30,000 to Rs 35,000 to invest after deducting all the expenses. Here is how he can go about investing, that  would align with his future and retirement plans 

AvenuesWhat is it?Why is it important for retirement planning?Estimated annual return
InsuranceContract between an insurance provider and a policyholder in which the provider agrees to pay a sum of money upon the occurrence of a specified event, such as death, disability, or illnessInsurance can provide financial security in the event of an unexpected event. This can help to ensure that you can maintain your desired lifestyle in retirementNA
Mutual FundsType of investment vehicle that pools money from investors and invests it in a diversified portfolio of assets, such as stocks, bonds, and othersA way to invest in a variety of assets with a relatively small amount of money. It is a good way to diversify your investment portfolio, which can help to reduce your riskEquity mutual funds may have an annual return of 10-12% while debt mutual funds may offer 6-8% annually
NPS (National Pension System)Government-sponsored pension scheme that allows individuals to save for their retirement yearsNPS offers a variety of features, such as tax benefits, flexibility, and choice of investment optionsThe equity option may have an annual return of 10-12%, while the government bond option may have an annual return of 6-8%.
PPF (Public Provident Fund) Long-term savings scheme offered by the Indian governmentPPF is a good option for retirement planning because it offers guaranteed returns, liquidity, and tax benefitsThe interest rate on PPF is revised quarterly by the government. The current interest rate is 7.1%
EPF (Employees' Provident Fund)Retirement savings scheme for salaried employeesEPF offers tax benefits and guaranteed returnsThe interest rate on EPF is fixed by the government. The current interest rate is 8.15%
Post Office SchemesSavings and investment schemes offered by the Indian Post OfficePost office schemes offer tax benefits, guaranteed returns, and liquidity. They are a good option for investors who are looking for a low-risk investment optionThe annual return on post office schemes varies depending on the type of scheme. For example, the Post Office Savings Account (POSA) offers an annual return of 4%, while the Post Office Monthly Income Scheme (POMIS) offers an annual return of 7.40%.

It is crucial to note that at the beginning of your career, you might not have a lumpsum amount to invest. But with time and experience, the amounts can gradually increase. The numbers above are just an arbitrary example.  

Automate: One of the best ways to invest religiously for retirement is by automating. This means setting up a monthly recurring transfer from your current account to your retirement account. You can even consider a SIP in mutual funds every month, for as low as Rs 150.

Review your plan regularly: As your life changes, you may need to adjust your retirement savings plan. Be sure to review your plan regularly and make changes as needed.

Retirement is an exciting time in life. It's a time to relax, travel, and pursue your hobbies. But you should also be financially prepared for retirement. By the early leap, you can ensure that you have the resources you need to enjoy your retirement years to the fullest.