Most people would like to retire early. But retiring early has its issues. We discuss the costs associated with early retirement and offer alternative solutions.

Retirement costs Suppose you start working at 25 and retire at 55. We will assume that your life expectancy is 85. So, your working and retired life, both span a 30-year period. This means for every year you work, you have to save and accumulate wealth to sustain one year of your retired life! Achieving that could be a challenge. Why?

Your current income should take care of your current living expenses. Then, you have to achieve short-term and medium-term goals such as making down payment for your self-occupied house and meeting your children’s college education costs. After meeting all these expenses, you have to set aside money for your retirement. Of course, you would be already saving for your retirement through your provident fund contribution or national pension system. But that has to be substantially supplemented with additional retirement savings if you want to retire early. Then, consider healthcare costs. When you are working, your employer is most likely to cover basic healthcare for you and your family.

So you will only have to create a healthcare portfolio to meet critical illness and buy additional insurance to cover major surgery costs. But when you retire, you should have a portfolio to cover your basic healthcare costs as well. Now, retiring early would mean that your healthcare portfolio should accumulate this wealth sooner than later. The issue is that healthcare inflation is higher than general inflation. You should, therefore, save significantly to create this comprehensive portfolio.

Your healthcare portfolio can be further stressed due to the emotional costs of early retirement and the associated financial expenditure.

When you are working, early retirement appears to be a desirable goal. But there is more to working than earning; you engage your brain productively during your working life. This keeps you emotionally and physically healthy. If you retire early, you will have additional years of full-time leisure. What will you do? It could turn out to be expensive if you do not actively engage yourself! Research in neuroscience has shown that cognitive aging sets in rapidly after retirement. Such individuals are also the ones more vulnerable to financial frauds.

And that is not all. When you stop working, your physical activities reduce. And that could lead to faster deterioration of your physical health. In other words, there is a possibility that your healthcare costs will increase if you retire early!

Financial freedom You should try to achieve early financial freedom, not early retirement. What is the difference? Financial freedom means that your passive income (investment income) is sufficient to sustain your lifestyle. But achieving financial freedom does not necessarily mean that you should opt for early retirement. You can choose to pursue work that you enjoy, for money will no longer be the primary objective for employment. Or you can choose phased retirement — working two or three days a week as a consultant.

In either case, you can supplement your investment income with active income to maintain your lifestyle. So, your investment income will last longer. This means you can lower your longevity risk — the risk that you will outlive your investments.

In addition, you do not have to depend solely on your healthcare portfolio to meet your medical costs. Why?

For one, your employer may take care of the medical needs of you and your family. Also, your work may keep you physically and mentally active, leading to slower cognitive aging.

The writer is the founder of Navera Consulting. Send your queries to portfolioideas@thehindu.co.in

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