In this handy guide to retirement, we will explore the possibility of an early retirement. We will tell you all the signs to watch out for that could mean you are ready to put your feet up earlier than you first planned to. We will also go that extra mile and caution you against some of the worst financial decisions you can make during your retirement.
Need help? Read about retirement planning for everyone. That will get you started.
Are you ready to retire early?
Retirement planning, as we all know, is essential to ensure that you lead a financially comfortable life post-retirement. Everyone probably wonders when they will be able to retire. But before you start dreaming about your retirement days it’s essential to plan for it i.e. you start a retirement fund.
If you already have a retirement fund then aim to fulfil these six conditions, which will help you retire earlier than expected. Shall we begin?
This is probably the most important factor to consider for a hassle-free retirement. If you find that you have no pending debts such as a Home Loan or Credit Card dues, you will not need to stress about making large payments in your golden years. A freedom from debt means that you can use your savings and retirement income to pursue your passions. It also means that if there happens to be an emergency requiring you to access your finances, you can dig into your savings without worrying about loan payments and other such debts.
Must Read: How Much Will I Need To Retire?
How much have you saved? Overshot your retirement savings goal?
Review your bank account statements to check how much money you have salted away in your retirement fund. You must have begun your retirement planning with a financial goal in mind. Now is the time to see if you have accumulated the desired amount in your retirement fund. Overshot the goal, huh? When it comes to money it’s always the more the merrier!
If you have exceeded your investments and savings target for retirement then you are all ready to retire early.
BB Tip: Do remember that if you do ultimately retire earlier than you originally planned to then your savings must be sufficient to tide you over for those extra few years. At least until you become eligible to receive pension payments.
Additional Reading: Investing In Your Golden Years
Your retirement plan charges nothing for premature withdrawals
Bet you don’t fancy paying extra penalties? What are we talking about? Well, if you decide to retire early, a penalty-free retirement plan, that permits you to make early withdrawals, before you attain the retirement age, will definitely be a blessing.
You can settle yourself into your comfortable armchair sooner than planned and withdraw as and when you need funds from your retirement plan. And the best part? You will not need to pay anything in the name of penalties for this rare luxury.
BB Tip: While your retirement plan might allow you to make premature withdrawals without levying a penalty, remember you will have to pay the applicable taxes on such withdrawals, as per your individual tax bracket.
Considering the advancements in medical care, it definitely goes without saying that the healthcare costs, too, are sure to advance with every passing year. If you want a worry-free retirement, it is important that you invest in a comprehensive Health Insurance policy to cover any medical expenses you might have to incur in the future.
Alternatively, in case you have health coverage under your spouse’s Health Insurance plan, this could help you realise your dream of an early retirement.
Read This: All About Family Floater Plans
Don’t bank solely on your employer-provided Health Insurance. Get one in your individual capacity. If you happen to leave your job, you will not be able to reap the benefits of an employer-provided health cover.
Check This: Misconceptions About Health Insurance
Can you live on your retirement income?
If you can comfortably live on a fixed income right now or at the time when you are considering an early retirement, you can be certain that you will not face too many financial setbacks post-retirement. You’ll be able to make ends meet with your pension money or and your retirement savings.
Additional Reading: Payout Options For Retirement Savings
BB Tip: Try living on a reduced retirement income so that you get an idea of how easy or difficult it may get to live on a substantially lowered income. Making the transition to retirement is much easier if you are used to living on a reduced income for a certain period of time.
Have you got a plan for what you will do during your retirement?
Make a plan for what you want to achieve during your retirement years. Maybe you want to travel to different places. You could also develop a profitable hobby. Alternatively, you could keep your eyes open for post-retirement part-time employment opportunities.
Additional Reading: 5 Post Retirement To-Do’s That Don’t Include Babysitting Your Grandchildren
BB Tip: Here’s what you could do. Like you did to test out your retirement budget, take a week (or two, maybe) off from work. During this downtime, plan your day’s activities as you might want to spend them in your retirement years. If you find that you get bored easily, maybe it is time for you to rethink your lifestyle and activities during retirement.
Worst financial decisions you can make during retirement
The advice going around is that you must ideally begin saving for retirement as soon as you get your first salary. A sizable retirement corpus, when you are finally ready to put your feet up, is essential to ensure a comfortable lifestyle during your golden years.
Taking the right decisions while planning for your retirement is most important. Let us tell you a few bad financial decisions you can make during your retirement years.
Thinking you will retire at a specific age
Many factors can influence the time when you retire. These may include reasons such as forced, early retirement, a lay off or bad health. To save yourself any stress, you should be prepared by beginning your retirement savings as early as you possibly can.
Also, turning 60 does not mean that you will automatically retire. You must analyse your income and cash reserves to find out when it will be suitable for you to retire.
Plan finances with the help of a professional
Get professional help to plan your finances. All of us have that one friend or family member who is a financial genius, or claims to be one, at least. Following the advice of these self-proclaimed financial experts may not be the best choice you make. A professional financial planner will be able to better assess your individual financial needs and provide investment advice.
Encashing pension benefits too early
After meticulously saving up over the years for your retirement, will you lose anything if you possibly manage to leave your retirement fund intact for a few more years beyond 60 years?
Remember, the longer you wait to finally dig into your retirement fund, the more retirement income you will have accumulated. This means that you will get a higher annual income initially. It is all a matter of a few years, really.
Not considering tax consequences
Many retirement savings plans offer investors partially tax-free withdrawals on maturity. Some of these retirement plans are the National Pension System and the Public Provident Fund. Premature withdrawals from these retirement plans can attract a penalty, with the withdrawn amount being liable to be taxed.
To avoid losing a sizable portion of your retirement corpus to the taxman, it is essential that you choose the most tax-friendly investment product for your retirement fund.
BB Tip: National Pension System investments in annuities are completely tax-free.
Failing to update your retirement plan
Consider your investment options carefully before you begin your retirement savings. If you are young at the time when you start saving for your golden years, you can safely think of investing in Mutual Funds. Don’t be too adventurous there now. Choose a fund with medium risk exposure. You need returns but also the safety of your retirement fund.
As you get older, reassess your retirement savings plan accordingly. At this stage, safety your retirement fund is paramount. You can move your funds to a Fixed Deposit.
Take the time to fully understand how to move funds from your retirement savings fund to your personal savings accounts. In case you need to move any money, think about moving money that is not liable to be taxed. A high tax penalty will significantly impact your retirement corpus. It is recommended that you have a talk with your financial planner to draw up a feasible distribution strategy for your retirement fund.
Not considering future medical and healthcare costs
It’s rare that people live to be 100. But using that number for your retirement fund planning will ensure that you stay in the safe zone. Outliving your savings is a troubling thought. Your retirement fund will need to be planned in such a way that it doesn’t exhaust too quickly.
Not diversifying your risk exposure
Investments are essential for wealth creation. Many people believe that their Employee Provident Fund and personal savings will tide them over in their retirement years.
But remember, putting your retirement fund in an investment product that offers you a high potential for returns will be beneficial. This will add weight to your retirement fund. How to do this, you ask? It’s simple. Spread your retirement fund across different risk profiles and allow the power of compounding to work for your money.
Diversifying your risks over several risk levels will protect your investments from market volatility.
Read This: All About Asset Allocation
Approaching retirement with heavy debts
Make repaying high-interest loans and debts your primary priority during your working years, before the onset of your retirement years. If you can enter your retirement years debt-free, consider that an achievement. If you are paying off high-interest debts during your retirement, this will probably eat a chunk out of your retirement savings.
Not downsizing your lifestyle on retirement
Based on the size of your retirement fund, you must be prepared to cut down your income and expenses by 25% or more. Planning to go on an expensive cruise or world tour immediately after retirement could dent a large hole in your retirement fund.
Two rather easy ways to downsize your post-retirement expenses will be by relocating to a smaller house and reducing the number of vehicles you own or operate. That will mean a lot more money in the bank and many worry-free golden years.
Now that you know all about these common retirement mistakes, you will be better informed when planning for your retirement.
Check This: Your Way To Retirement
Picking the right model of investment will help kick-start your retirement fund. What are you waiting for? Start now.