think of retiring every single week. Especially on a Monday after a relaxed weekend.
As I get to work in a crowded suburban train, visions of getting up late, sauntering around the house (remotely located at a considerable distance from the city), indulging in siestas and watching all the possible movies crowd my mind.
Then I think of my father's decision to retire and I am quickly drawn back to reality.
Retirement is not as easy as it is made out to be.
So all you young people in your 20s who swear you will retire in your 40s better start planning for it right now.
How my father went wrong in his decision
My father did not retire early. He was 53 years old when he decided to call it all to a halt.
Since my mother was working, he figured we could manage on her salary.
He retired from the Indian Oil Corporation in 1993 and led a peaceful life for the first two years of life. Then, tragedy struck when he suffered a heart attack in 1995.
The medical bills mounted as he had no regular income. Since he had opted for voluntary retirement, the company could not extend any medical benefits (a given when he was still employed).
My sister and I were both in college and not working. So my mother had to bear the brunt of household expenditure.
All my father's retirement savings income went towards his nursing and hospital expenses.
My father committed two grave errors:
i. When calculating how much he would need to save to live comfortably, he did not take into account the medical emergencies.
ii. Also, he just assumed that interest rates would stay constant. Interest rates did not go up or stay constant. They fell. And dealt a major blow to his savings.
Lessons to learn
Based on my experience, here are a few pointers to keep in mind when planning an early retirement.
Insurance! Who does not need it?
There are three types of insurance you must consider.
i. Medical insurance
Always ensure you are adequately covered for medicals. Despite how healthy or wealthy you are, you must take an insurance cover.
Take it when you are young and keep it going. Insurance is meant for catastrophes. Don't ever be under the assumption that you are above it.
ii. Life insurance
The most basic form of life insurance is term insurance.
Here, the entire premium you pay goes towards covering the risk of death over a certain number of years. Say you insure yourself for 30 years. You will have to pay a one-time premium for all these years, or a premium every year.
If you are still alive after the term is over (30 years, in your case), you will forfeit the premiums paid.
But if something unfortunate were to happen to you when the insurance cover is in force, your beneficiary gets the amount due.
The endowment policy is also for a particular time. Let's say 30 years. Should you die during this period, your beneficiary will get the money. Should you survive, you get the money after 30 years.
The whole life policy makes you pay premiums all your life. There is no fixed term. When you die, your beneficiary gets the money.
iii. Home insurance
This one is not mandatory. But, to really play safe, take out a home insurance, too. A fire or an earthquake destroying your house may seem unreal. But don't take the chance.
Interest rates: where are you headed?
Downwards. That's where. When you do your retirement calculation, remember: interest rates are an important variable.
It is foolish and disastrous to assume that interest rates will remain constant.
The move is more towards a gradual decline in rates as India gets more aligned with the global economy.
Take the case of the Public Provident Fund. It was initially 12% per annum, dropped to 11%, then 9.5%, and is now 8%.
Even the savings bank account interest rate has dropped to 3.5% from 5%.
Interest rates on fixed deposits in non-banking financial companies used to touch 16% a decade ago.
Do remember that interest rates are going to dip even more over the years.
Do consider equity!
You must consider investing in shares if you want a substantial return on your investment.
You can directly buy shares or invest via mutual funds.
If you manage to save Rs 5,000 every month for 30 years at an average rate of 11% per annum (only equity can give you such a high return), you will have Rs 1 crore (Rs 10 million) in 30 years.
Inflation! It stings!
This will affect your savings and expenses every month.
For instance, Rs 10,00,000 may buy a lot today. But, as inflation eats into your money, it will buy much less down the road. Your savings may seem great now, but not sufficient to last you for the rest of your life.
Let's say you want to buy something worth Rs 15,000 today. Twenty years down the road, it may cost you Rs 32,867, assuming an inflation rate of 4% per annum.
So when you calculate future earnings, you will have to do so keeping in mind the fact that your rupee is depreciating in value.
Think differently
Finally, it would help if you have a source of additional income when you retire.
You could pursue a hobby like pottery and convert it into a part-time business later.
Or maybe even invest in a home that you can lease out later to earn a regular rent. Or buy a shop in a commercial complex and rent it out.
If you always wanted to be a teacher, you can teach at a local school or college or give tutions at home. If you play a musical instrument, you can teach aspiring musicians.
If you enjoy trekking, you could organise such expeditions and be a travel guide.
Explore avenues you would like to pursue and work towards it.
All set to begin?
When planning for your retirement, do not view any area of your life in isolation. Take into account the entire investment scenario, your lifestyle needs, the number of dependents and potential crisis.
That's one time in your life you would detest nasty surprises.
Happy dreaming and planning!
Illustration: Uttam Ghosh
