Retiring Early through Financial Independence

Wouldn’t it be great, if one did not have to go to work or have to earn for a living but have enough resources to last a lifetime with the independence to live a lifestyle of choice. Well we all know that movie stars, erstwhile kings and emperors and their dependents and extremely wealthy people do live lives like that or at least it appears to be so, but can a citizen belonging to the salaried class ever dream of such a life. Well, as it turns out, it is possible if one saves from the early part of his working age and does some careful investing. This way he should be able to save enough towards the middle of his working age so that he need not work for the rest of his career and lives a life of comfort and bliss without having to worry about finances ever again.

Retirement planning is now an established and mature practice. It is available through banks, insurance companies and even through financial advisors. Executed properly, it can ensure not only a lifetime of financial independence but also provide for major expenditures like education of children, purchase of real estate and even planning for a holiday. Retirement planning as a part of financial planning also helps an individual determine his goals in life and plan accordingly to achieve the same in a time bound manner and prepare and provide for the same in the most efficient manner possible.

In practice the most important factor to consider for retirement planning is how early one needs to start, followed by how much you are willing to set aside from your monthly income and how you are going to invest; but in practice retirement plans are designed bottom-up, and involves the following four steps:

Deciding on how much income you want on retirement – This is the first and the most difficult step in retirement planning process. Deciding on the retirement income amount involves a lot of things, primary among them being one’s health-related expenses and the likely expenditure incurred as one progress through the ageing process. The second most important thing is to take care of one’s short term to medium term liabilities, for example one may be servicing on a long term mortgage loan or may be paying off an educational loan, in which case his ability to put off a higher sum for savings may be severely limited The third most important thing to consider is what kind of lifestyle one wants to live post retirement and the requirement of lumpsum amount for emergencies or unplanned but critical expenses. The next important aspect being the number of dependents one is going to take care of after retirement including their healthcare and other requirements.

Calculation of sums receivable on retirement – The next important step is the actual number crunching. It would involve the actual rates of interest available on different investment avenues and compounding of the returns. So that we arrive at the figures that we have decided upon, this step most often than not throws insights into the adjustment of time period and the monthly contributions to be made, the life expectancy of the individual post retirement, as well as the affordability or forgoing of some of the benefits that one is planning for post-retirement, given the current availability and constraints of resources. All the above calculations, however, must also include the element of inflation as the planning is being made for a long-term horizon.

Selection of a retirement plan -  The third step in this process is the selection of a certain retirement plan that fits all the above requirements that have been determined by the individual as necessary after retirement. Different financial institutions offer different plans to suit the needs of a variety of retirement income and other needs. While some offer single plans covering individual requirements, others offer a basket of products which working in tandem will take care of all of individual’s requirements. Alternatively, an individual may himself build a plan either on his own or with the help of a financial planner or an adequately informed professional, where he would invest in a basket of recommended assets which would cater to his long-term requirements. Another important decision in the selection of a plan is to look at the levels of risks associated with different investment vehicles that one intends to put his money in. The investor should choose a combination of plans so that the aggregate level of risk is suited to his requirements.

Starting it early – A good retirement plan, which puts less burden on an individual and also helps him secure better retirement benefits is always to start early. Also one also gets the benefit of investing in assets with a higher level of risk and consequently with a higher return potential if he is able to start early. If one starts late in life, then safety becomes a greater concern for him. Reliance on more of savings may be the only avenue available for him, instead of going in for a potentially higher return investment avenues which would be accompanied with a higher level of risks. Also starting early and planning one’s life early leads to achievement of greater number of life’s goals, better handling of unforeseen challenges and a comfortable retirement life as has been observed over long periods of time.

Though retiring early may seem a good idea, this only means retirement from work and not retirement from life. The above four steps while helping a person transition into a less burdensome life, doesn’t speak of how one must plan to live a life in retirement. A retirement should never mean loss of productivity for a human being. A healthy life essentially involves being moderately active which would involve some activity whether with pay or without pay and will keep an individual engaged and keep his mind and body healthy. It is an observed fact that people who live an active life post their superannuation have lesser health complications and tend to live longer. It has also been observed that after retirement a sense of worthlessness often sets on to an individual, which over a short period of time severely deteriorates his mind and body.  Taking up a new hobby or engagement after retirement gives an individual a sense of purpose and worth.