There was a time when slow and steady wealth creation through savings allocated to bank deposits was enough to sustain through retirement. Jobs both in private and Government sector were long term in nature and held the promise of a pension. Moreover, individuals spent at least 40 years working to save up for retirement which could then be for the next 20-25 years.
All this has slowly but surely changed. Job security is not a given, hence, there is practically no way of relying on a pension. Secondly, individuals actively strive to work for fewer than 30 years and support retirement for 30-35 years. In a way, the tables have turned.
To achieve this goal of early retirement, it’s imperative to perfect these two things.
1. Maximise your saving to the tune of 40%-50%
Ideally what you don’t spend from your income is your saving. But if you are planning to retire early – say in your 40s or even if it is in your 50s – you have to start saving first and then figuring out how much you can spend. Maximising savings means saving as much as you can. At least 40%-50% of your income needs to go into to savings.
It will become paramount that you keep temptation at bay. This might mean possibly shifting to a lower value accommodation or even cutting down on the number of things you own right from clothes to gadgets.
Its all in the realm of the possible, the outcome depends on how you execute this part of your life. The only way to increase your savings is to reduce your spending for these years and given the time frame involved, saving has to be notched up right from the start.
Not only do you have to replace active income with investment income, but you also have to budget for the growing value of investments for a longer post-retirement period in order to combat the impact of inflation effectively.
2. Maximising investment growth
This is slightly harder to do as part of it is not in your control. Nevertheless, you must recognise that retiring early means that your investments must work even harder in a relatively brief period.
Plus, over time, inflation eats into the value of your money and reduces it. Not only do you have to replace active income with investment income, but you also have to budget for the growing value of investments for a longer post-retirement period in order to combat the impact of inflation effectively.
To do this you must take higher calculated risks and tilt your asset allocation more towards growth assets like equity. Moreover, active management of equity allocation will help. Passive, buy and hold, index like strategy requires a long time to deliver the expected inflation plus returns.
However, the assumption with early retirement is that you have lesser time for a part of your investments and hence, you need the boost of equity returns but with active management to maximise it. This does not mean you take on undue risk and invest in stocks with a false promise of trading gains. You can build a portfolio of managed funds, but track progress and manage the growth in investments in a timely manner.
Aggressive saving and nimble investing in growth assets like equity is a priority if you want to retire early. You may attempt it yourself or better yet, get an advisor to handhold you through this critical phase of life.