There are several reasons why you may want to hang up those working boots sooner than your contemporaries. Maybe its to travel the world extensively or give back to society in a more meaningful way by investing your time or you may simply want to settle in a sleepy town to go fishing every day. Whatever your reason, if you plan to retire in your 40s you need to be well prepared financially.

Here are three financial pillars that you must create beforehand.

1. Invest to a maximum – If you are retiring early, two things are a given; you have to fund your lifestyle for half of your life, without a clear idea of regular income flow. The regular income is a safety net in early years of asset growth when there can be volatility. Secondly, your expenses are only going to increase every year thanks to inflation, even if you don’t spend more. To sustain your choice of lifestyle and the impact of inflation on your expenses you have to start investing in growth assets at the earliest. 

Growth assets like equity allow you to compound gains and create wealth. On the other hand, if you rely only on fixed income assets like bank deposits and bonds, you are likely to earn insufficient return from fixed interest pay outs, which are unlikely to grow your retirement kitty substantially.

Not only do you need to tilt your asset allocation heavily towards growth assets but you must also invest more and spend less in the pre-retirement years.

2. Cover the contingencies – When you retire early, you have given yourself lesser number of years to focus on growing your assets while earning a regular income. Hence, you have to keep some of those funds invested long after you retire. One way, to free up funds, is by insuring some critical spends that can come up. This includes medical expenses and even home insurance for household items which can undergo damage thanks to a natural calamity or theft.

By buying essential insurance, you free up the rest of your lump-sum money; financial impact of emergencies is already covered. This leaves your money free for being invested towards growing wealth.

How much you allocate to your different retirement kitties like your equity basket for creating and growing wealth, your emergency basket or your insurance expense will ultimately depend on the kind of lifestyle you want to maintain post retirement.

3. Have an emergency corpus – At 40 or 45 years of age, you still have another 30-40 or more years, at least, of health and life to fund. While the idea of growing your wealth with risk assets like equity is essential, you must also have an emergency corpus set aside for unforeseen expenses. Say, your grown-up son has some health issue while overseas.

You may have to pitch in some money for his treatment or even fly down to be with him for longer than you anticipated. There are many such things that can come up and as much as possible you don’t want to use the equity assets meant for long term growth. Have a separate emergency corpus that can be used for such unforeseen expenses. This money can be invested in stable, high quality debt funds like liquid or short-term funds and left untouched till needed.

How much you allocate to your different retirement kitties like your equity basket for creating and growing wealth, your emergency basket or your insurance expense will ultimately depend on the kind of lifestyle you want to maintain post retirement.

Whatever the size of the corpus, retiring early means you have to start planning for post-retirement contingencies and expenses early too. So, think about spending less and investing more at least for 10-12 years before you want to retire.