The secret to invest smart and RETIRE early

When you are younger, you can afford to take on more risk and be more aggressive with your investments. 
While planning for retirement, the key is to let your money be idle, says Amar Pandit.
Illustration by Uttam Ghosh/Rediff.com

How often do you dream of being free of your work shackles and spending your time doing activities that give you true joy?

While not everyone is fortunate enough to derive that joy from their workplace, if you plan well, you can live the life you daydream about sooner than expected.

As appealing as retiring at the age of 45 sounds, it requires a lot of thought and preparation.

You need to consider the rising inflation rates, the demands of your financial responsibilities and be realistic about your retirement plans.

To consider retiring early, you need to have a clear vision and purpose of what you will do once you retire.

Only then, with the right combination of discipline and good planning, can you retire early and embrace your true passion.

The first step in planning your early retirement is calculating the magical number that will free you from your work-related obligations without expecting you to compromise on your current lifestyle.

To get an estimate of this number, start with your current expenses.

Discount costs that will be absent post-retirement and inflation. This number should also include your emergency fund.

The following tips will guide you into preparing for early retirement:

Set a target for your savings

Start investing for your retirement when you start working your first job.

Earmark at least 25% of your annual income for your retirement.

While this may not seem like a lot, as your career advances, this 25 per cent will add up. This nest egg will not only enable you to retire but also cushion the blow in case of any unexpected liability.

Watch your expenses

Keep a keen eye on your expenses.

A disciplined spending habit will help you save more as well as inculcate a frugal spending habit in your retired years.

Prioritize your expenses into necessities and aspirations.

Though you cannot cut back on necessities, you can definitely hold back on the aspirational expenses.

While you should indulge from time to time, avoid making it a habit.

Consult a financial planner

Consult with a financial planner and inform them of your intention to retire early.

They can provide expert advice on how to best invest your money and navigate your investment decisions so you can comfortably retire at the age you want.

Invest in equity at the start and debt later on

When you are younger, you can afford to take on more risk and be more aggressive with your investments.

While planning for retirement, the key is to let your money be idle.

Often people lock their savings in FDs but don't account for inflation which ends up eating into their wealth. Thus, opt for investing in equity instead of debt options and optimise your returns.

It has the potential to deliver great returns in the long run.

While starting, your objective should be to maximise returns while taking a certain amount of risk. However, as you progress towards your retirement age, you can rebalance your portfolio to favour debt.

Pay off all your loans

Stay clear off any debt if you want to retire early.

By cutting off your primary income, it would be extremely stressful if loan payments eat into your savings when you retire.

Start your EMI payments as early as possible. It is advisable to set aside a minimum of 30% of your net income for EMI towards your housing loan.

Income after retirement

As you plan on retiring early, you will be physically capable of earning, but in ways agreeable to you.

Research ways in which you can monetise your retirement plans.

Start a blog, try consulting, be a guest lecturer. This allows you to enjoy some additional income as you live the life you have worked hard to get.

Avoid dipping into your retirement fund

When you set a retirement course for yourself, it is imperative to stay true to it to achieve it.

If you dip into it to realise another goal, you will inevitably end up delaying your retirement.

Once you retire, you can start systematic withdrawals from your mutual fund investments.

This is a convenient and tax-efficient method to supplement your retired life.

To summarise, plan well, invest smart, build wealth and retire early to fulfil all your dreams.

 Amar Pandit, CFA, is the founder of HappynessFactory, a fintech company.