A Guide to Early Retirement Planning in 2024

No matter how much you love your job, someday, you will want to take it easy, reap the fruits of your labour, pursue your passions, and simply enjoy life.  But, how do you make sure you save enough for those post-retirement years? The answer lies in starting with retirement planning early in life. 

Did you say, I am too young to think of retirement?

Well, if you are old enough to earn a living, you are at the right age to begin saving for retirement. Ideally, set the wheels of retirement planning in motion right after receiving your first pay cheque. 

This chapter will focus on the importance of starting saving for your golden years early and how you can embark on this journey with confidence and ease.

Advantages of Early Retirement Planning

Below are some ways in which starting saving for retirement early can empower you:

• You can capitalise on the power of compound interest and make the most of your investments over a longer period. Even smaller sums invested now will grow into a significant corpus by the time you retire.
• If you are investing in market-linked financial instruments, you will have a longer timeframe to tide over short-term fluctuations. You can even invest in high-risk, high-return assets initially. 
• Many retirement savings plans offer tax benefits, which can help you reduce your outgo and build a larger corpus. 
• You can keep pace with the healthcare costs that are rising at a phenomenal rate and save enough to tackle emergencies or periodic check-ups in retirement. 
• Many of us compromise on our hobbies and dreams amidst the demands of a hectic career. Early retirement planning can help you save for passion projects or indulge in expensive hobbies later.
• Early planning enables you to achieve financial freedom and peace of mind at a young age. 
• It is relatively easier to set aside money for investments early in life when you have fewer responsibilities.

Now that you understand the advantages of early retirement planning, it is important to set realistic goals and work towards them.

Are you ready?

Setting Retirement Goals 

With clear goals in sight, it is easier to ascertain the money you’d need for retirement and devise a clear strategy to fulfil those goals. It is a good idea to start with an assessment of your present financial condition and expenses and plan for the future accordingly. Here is how you can do that:  

• Calculate how much you spend currently (monthly and annually), including rent, utilities, groceries, healthcare, transportation, and other recurring expenses. 
• Identify potential income sources for your post-retirement years. These might include pensions, dividends, rental income, interest from investments, provident funds, inheritance, etc. 
• Estimate how much you are saving and investing currently. Consider all accounts and assets. 
• Separately enlist all your debts and liabilities. These will include loans, mortgages, credit card debts or other amounts that you may owe friends or family.
• When you consider the age at which you wish to retire and the average life expectancy, you can arrive at the number of post-retirement years that you will need to plan for. It will also help you find out the number of years you have left to reach your retirement savings goal.
• Estimate the expenses you are likely to incur post-retirement to support your everyday lifestyle, medical needs, travel plans, hobbies, etc. 
• Inflation can negatively impact your purchasing power. So, to estimate future expenses correctly, factor in an approximate inflation rate based on historical data. This way, you can save enough to maintain your lifestyle and fulfil your dreams after you stop working. 
• Assess your present insurance coverage, be it for health, home, car, or all of them. Check if you are likely to need more coverage around retirement and assess premium outgo at various stages. 
• Consider your current tolerance for investment-related risk and evaluate how it will evolve with time. 

Once you have the above data, you can put together a retirement budget that factors in expected expenses and income. This will help you identify gaps and strengthen your corpus over time. However, as the economic landscape and your financial circumstances evolve, you must review and adjust your retirement plan accordingly. 

You can also use retirement planning calculators available online to estimate the amount of money you will need every year after retirement, how much more you need to accumulate in the retirement fund, and the amount you must save every month to reach those goals.  

After determining your goal, it is now time to start investing and growing your current capital into a sizable corpus. However, which investment product should you choose? Should you invest all that you retain after making the necessary expenditures? The answer to these questions depends on whether you have an emergency fund and also your risk tolerance. We will read about these crucial concepts in the next section:

Risk Tolerance and Emergency Fund 

Anyone looking for financial advice often comes across the terms risk tolerance and emergency fund. These are not just buzzwords; they play a significant role in determining your financial bandwidth. The information below will help you understand them better.

Risk Tolerance 

Risk tolerance is all about how comfortable you are with the ups and downs in the value of your investments. It's influenced by several factors, like how long you plan to invest, what you're aiming to achieve financially, and how okay you are with the idea of volatility in the market. 

Figuring out your risk tolerance is important for setting up your retirement savings in a way that suits you. Say you're ok with taking risks; you might lean more towards stocks in your portfolio. 

But remember, with retirement savings, you're playing the long game, and markets can get shaky. Knowing your risk tolerance helps you build a portfolio that you can stick with, even when the markets are turbulent. This prevents you from making hasty decisions when the market dips. As retirement gets closer, your risk appetite might shift a bit. You might start looking for a balance between having a steady income from your investments and still having some growth. 

Emergency Fund

An emergency fund is like your financial safety cushion, made up of cash or other assets you can quickly turn into cash. This fund helps you with sudden expenses like home repairs, medical bills, or any other unexpected costs, so you don’t have to dip into your retirement nest egg. An emergency fund keeps you financially steady and gives you peace of mind, knowing you're prepared for life's unpredictable moments.

After putting an emergency fund in place and determining your risk appetite, you can devise your investment strategy accordingly. While there are proactive ways to protect your savings, you may still be in trouble if an emergency comes knocking on your door. Insurance is a great tool to tackle such situations. Apart from emergency coverage, some insurance plans also offer an option to save for retirement. The following section will discuss various insurance types that can help you save for your post-work years.

Insurance Types for Retirement Planning 

Below are some types of insurance plans that can be worthy additions to your retirement strategy.

• Immediate Annuity Plans: Think of these plans as a trade-off. You pay a substantial sum upfront, and in return, you get a guaranteed income stream, either for a predetermined period or for the rest of your life. It's like buying peace of mind, ensuring you have a steady flow of income post-retirement. These plans also offer tax benefits.
• Deferred Annuity Plans: These plans are all about the long game. You contribute regular premiums over a set period, accumulating and growing. Upon retiring, this pot of money starts paying you back in the form of a pension. Like immediate annuity plans, these too often come with tax advantages.
• Term Insurance: Term insurance is often regarded as the most affordable life insurance type. It is essentially a safety net for your loved ones. These plans cover you for a specific timeframe, and if you were to pass away during this period, your chosen beneficiary would receive a lump sum. While it doesn't offer you direct benefits, it ensures your family's financial future is secure.
• Health Insurance: As we age, our health becomes more unpredictable. A comprehensive health insurance policy helps to cover a range of expenses, from routine medical bills and hospital stays to more significant costs associated with serious illnesses. Adding critical illness coverage can be very helpful for those at higher risk of specific conditions. These policies and riders protect your retirement savings from unexpected medical costs.
• Long-Term Care Insurance: Retirement can bring with it the need for ongoing care, whether at home or in a facility. These expenses can quickly pile up and become a financial burden. Long-term care insurance covers these services and ensures that your retirement funds remain intact.
• Homeowner's Insurance: Your home is likely one of your most significant assets. It is thus important to protect it against unforeseen events like natural disasters, theft, or accidents. Homeowner's insurance covers repairs and replacements and also safeguards your retirement savings from being depleted by unexpected property expenses.

Remember that it’s not enough to purchase insurance once and forget about it. You might need to review and adjust it periodically. 

Reviewing and Adjusting Coverage 

Say, you start retirement planning from the age of 30. Since you are young, healthy, and have very few responsibilities, you can make do with insurance plans that offer modest coverage. 

However, your situation, needs and financial ability will change with time. You might start a family, decide to take care of elderly parents or buy a fancy car. You may also want to send your children overseas for higher education. All these decisions or circumstances directly impact your retirement savings and need for insurance.

Hence, reviewing insurance coverage and adjusting the same periodically is important. Consider the following in this regard: 

• Any major life event, like the diagnosis of a serious health condition, marriage, childbirth, death of a parent, etc. 
• Assess the number of dependants and their needs (if your spouse and children are financially independent, you might need less coverage)
• Your likelihood of contracting a serious illness based on your age, lifestyle, genetics, or environment
• Possibility of a job change or promotion that might increase your income
• Possibility of receiving an inheritance or windfall 
• Any change in your retirement goals 

While tweaking insurance coverage, explore and learn about the latest products and add-ons in the market. They might align with your retirement planning goals better. You can also consult a financial advisor to identify any gaps in your existing coverage and address them efficiently. 

Now that you understand early retirement planning better, it is time to move to the next chapter, where we will dive into popular retirement saving options and understand the role of retirement calculators in helping you chart a smart plan.