Mr. Balakrishnan’s life is as normal as any other salaried professional. Every morning he wakes up at 6.30, takes a bath, eats breakfast and exactly at 8’o clock he leaves for his office. Similarly, in the evening, around 7.30, he travels back to his home. After having dinner with his wife and kids, he reads a novel, checks his office emails and then goes back to bed at around 10.30.
This is MrBalakrishnan’s life at the age of 59. He had enough of corporate life and wanted to retire five years ago, but sadly he could not because he had not planned his early retirement well enough.
So where did he go wrong? Here are the answers
1. He didn’t start early
When he was in his 30s, he thought retirement is a too far goal for to start investing. In the 40s, saving for an SUV or going for an international trip was much higher on his priority list. Suddenly,at the age of 45, he was jolted with the realization that the time for retirement was near. Then he started investing for retirement primarily because he dreaded that he will not be able to save enough for it.
Now in his late 50s, even though his body and mind want him to retire, his financial conditions are restricting him from doing so. He doesn’t have sufficient funds to support his life post-retirement. Hence, the only option he has left with is to keep working and investing till he accumulates enough funds to support his retirement.
|Current age of the investor (in years)||Monthly Investment (in Rs.)||Numbers of years remaining for retirement||Total value at retirement, in Rs. (at 10% returns)|
*We assume retirement age as 50
It is clear from the above table; delay in retirement planning could prove to be costly for you. Also, the power of compounding, which acts like your best friend in growing your wealth requires some time to show the real magic. Earlier, Balakrishnandelayed his retirement planning, and now his lack of retirement planning delayed his retirement.
We guess, no one told him, “Time and tide wait for no man”
2. He dipped into the retirement corpus before retirement
To compensate the lost time, Balakrishnan started investing money with great enthusiasm. However,he put his retirement planning in the backseat when his son completed schooling and ready to go to college. To pay college fees and other expenses, he had no other option but to dip into his retirement corpus.
Initially, many people show enthusiasm towards their investment which fades away when a new financial need arise, especially when it comes to child’s education. People like Balakrishnan should understand the difference between retirement corpus and corpus meant for child’s education, and if they can’t, then they better understand that early retirement is not meant for them. Though a child’s future is important but it should not be secured on the cost of your retirement. Secure your child’s future with other investment options.
Balakrishnan should always remember, “Any mismanagement can lead to unintended results.”
3. He was not a disciplined investor
Retirement is not only about putting money, but rather how disciplined you are doing it, which is also reflected in your attitude towards investment. Do you save first and then spend the remaining amount? Or you first spend and then save the remaining? If it is the first, you can think of early retirement, but if it is the second option, then you may require to work until 60- year or even after that also.
Balakrishnan did not listen to Warren Buffet, who said, “Don’t save what is left after spending, but spend what is left after savings.”
4. He underestimated the power of the inflation rate
Balakrishnanunderestimated this shark. He continued investing his money but failed to understand the inflation impact. By the time he retired, he had realized his corpus was not enough to beat the inflation rate. With every passing year, the inflation rate increases and our purchasing power reduce. If you think, the inflation rate will rise to 7%,then make sure your current investment should give at least 8% or more than that.
|Inflation Rate||Current Monthly Expenses||Value after 10 years||Value after 20 years|
As it is clear from the above table, if your current monthly expenses are 50,000, you would requireRs 98,357 after ten, to manage your household expenses. The same amount will become Rs1,93,484 after 20 years.
We have not changed the inflation rate, so you can assume how high the amount would become if the inflation rate also rises. Hence, to retire early, keep the inflation rate in consideration otherwise it will eat your retirement funds.
No one ever told Balakrishnan that, “Inflation is taxation without legislation”
5. He did not make right investment
As Balakrishnanignored the inflation impact, he selected wrong investment options which did not generate good returns. For his early retirement, he relied only on provident fund, bank fixed deposits, and EPF. Most of these traditional investment options give returns between 7-9%, which is not sufficient to build a huge corpus for retirement.
For retiring early, one should choose equities, which have given returns more than 12% in the past few years. As per the Economic Times, the domestic market can deliver 20% returns in FY 17. So it is important to diversify your investment portfolio by investing more in equities to generate high returns and the remaining in debt.
Also, when you reach near to your retirement, switch your money from equity to debt instruments in order to safeguard the investment from market fluctuations. For instance, ICICI PruEasy Retirement allows you to invest your money in equity or debt as per your choice. As you reach near to retirement, you can switch money from equity to debt. Along with generating high returns, it also gives a guarantee on the money you invest. On maturity, you’ll get the assured benefit or fund value, whichever is higher.
As a general rule, 100 minus your age is the percentage of savings to be made in equities, but as you are planning to retire early, say at 50, you should go for an aggressive asset allocation, which can be like this,
Balakrishnan’ssituation would have been different if he had listened to Warren Buffet, who says, “Do not put all your eggs in one basket.”
6. He did not repay his financial liabilities in time
Balakrishnanpostponed his retirement date because he still had liabilities like home loan, car loan, etc. If he had retired, his retirement corpus would have gone into repayment of financial liabilities.
Before retirement, one should always concentrate on paying off liabilities like home loan, credit card. You should start with loans which carry the maximum interest rate. No one wants their retired life to be burdened with EMIs.
So take a lesson from Balakrishnan’s mistakes and start planning your retirement now by investing in a good retirement plan.
A monthly investment of Rs 4167* can give Rs 30.34 lakhs if you retire at the age of 60, considering the rate of return as 8%. In fact, a small saving over a large period of time will give better returns than large savings over a small period. Moreover, you can buy a good retirement plan online also. It means planning for retirement is only a few clicks away!
* calculation is for a 35-year old, earning Rs 5 lakhs annually and saving 10