5 Tips to Retire Early and Rich

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Published on May 15th, 2015 | by Joan Makai


Everybody hopes to retire early and enjoy a few foreign trips and cruises before settling in a home that has everything that they wish for and need. But achieving this target is not easy. Especially because there are medical expenses as well as children’s education expenses to be accommodated within a given time frame. That does not mean these targets ought to remain a pipe dream. Retirement planning is a slow process, but it requires steady savings and investments and a little bit of ingenuity. Hereunder are five tips to retire early and rich

  1. Know what you want at retirement

 This may seem funny, but not many know what they want when they retire. They fantasize about retirement, yes. But they do not think much about details. Therefore, the first step is to identify what is desired and how much would be needed for that. Today there are tools like spreadsheets to help in retirement planning. Since wants and desires differ from person to person, conventional retirement planning tool may not be sufficient for retiring early. Therefore, developing a spreadsheet that clearly identify the present values of all expenses that need to be met during lifetime should be listed in rows and years should be mention in columns. Now compound the costs for each year considering the highest inflation in the preceding 20 years. Develop corresponding cash inflows as well to arrive at deficits. Those are the missing teeth that need to be filled through savings.

  1. Start saving early

If your present income is barely sufficient for your survival, don’t be disheartened. Keep track of how much you needed to save in a particular year, and keep compounding it at the inflation rate. This should be treated as a debt to your retirement account. When income increases, reduce this debt by investing in stocks, mutual funds, ETFs, or other diversified pension funds. Consider investing in pension funds such as 401K, Roth IRAs, etc., as an almost mandatory requirement.

  1. Remember rents are a significant cost but house is an asset

Do not plan to pay rent forever. Instead, plan to buy a home at some stage, preferably within first ten years of employment. Do not go overboard in purchasing the first house because that is not where you will live eventually. Settle for a smaller house that fulfills most of your needs, and pay home loan installments. These will help you save taxes and leave an asset in your hand, which you can sell at a later date to buy your dream house. Alternately, you can use this house as an investment property.

  1. Invest in stocks when everybody is running away from the market

Equity markets have their bull and bear phases. Neither period lasts. But it is possible to enter these markets in a bear phase, and exit when the bull phase is well entrenched. If you feel that your nerves cannot take such volatility, try systematic investment plans. These are “fill it, shut it, forget it” type of investments. The compounded returns will be visible only after 10 to 15 years. However, do spend some time with a financial advisor to identify which of these SIP investments would be right for you considering your targets in life.

As a thumb rule, 1/3rd of your monthly income needs to go into some investment, provided the 2/3rd is sufficient for living. Therefore, plan to save that much from the beginning of your career. Periodically review the investments vis-à-vis your targeted requirements for that year in the spreadsheet. If need increase the quantum of investment or shift to another stock or asset class offering better returns. Financial advisors can guide in such things.

  1. Do not withdraw money from retirement funds

That money should never be treated as something available for regular usage. There are a few times it can be removed, such as medical emergency or conversion into another asset class. But withdrawing it for buying car or clothes is not advisable at all.

Retirement planning if done systematically, for a long period, a fun-filled comfortable early retirement is within everybody’s reach.

Photo Credit: 401(K) 2013 via Compfight cc



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Joan Makai



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