Most young people who seek financial advice these days have just one question: How can I retire early? But what must you do (or not do) to hang up your boots in your forties? Here are five suggestions.

Plan early

To retire in your forties, you must plan for it in your 20s. This is because, saving up enough funds for comfortable retirement needs quite some time.

Consider this instance. An individual who is 35 years of age, with monthly household expenses of Rs 25,000, decides that he must retire at 45.

This will require him to hold a corpus of Rs 1.73 crore at 45 to meet living expenses. This should earn one per cent more than inflation, every year post retirement.

To reach this target, he will need to save a sum of Rs 76,074 per month today and invest it at 12 per cent a year. A tall order, isn't it?

Now, contrast this with a 25-year old. To get to the same sum , he will need to save only Rs 17,500 a month (over 20 years, of course).

So Rule # 1 is: To retire in your forties, you need to plan for it in your 20s.

Rethink owning a home

If you want to retire early, you may have to reconsider owning a home too.

Buying a home is one of the biggest financial investments people make in their lifetime. The sum that most of us sink into our home makes it the largest component of our portfolio.

Typically, in India, equated monthly instalments on home loans take up 50 per cent or more of monthly income. Therefore, buying a home early reduces the surplus to meet all other goals.

Let us consider an individual who wants to buy a home for Rs 33 lakh with a loan of Rs 25 lakh. At 10 per cent for a 15-year period, the EMI on this sum is Rs 26,835.

At the end of a 15-year period, with a 7 per cent annual appreciation in property value, the house will be worth Rs 91 lakh.

But assuming the individual had no surpluses beyond the EMI payments, this will be the only asset he owns.

Instead, the same individual could opt for a rented home. He can invest Rs 8 lakh (down payment for buying the house) in a plot of land.

Say, he rents the same home at Rs 10,000/month. Of the Rs 16,835 surplus that he has, he can invest as much as Rs 19,835/month (assuming HRA benefits) in other assets.

Now, if rents increase at 7 per cent a year, his monthly investments may dwindle. But even these investments will help him accumulate Rs 79 lakh in 15 years (at 12 per cent returns).

In addition, the plot's value, if growing at 15 per cent, will be Rs 57 lakh at the end of 15 years.

That totals to Rs 1.36 crore, Rs 45 lakh more than the value of his own home, under the first strategy!

Rule #2: If you are planning for early retirement, you should rethink owning a home, if it is at the cost of other financial goals.

A reasonable lifestyle

How much you save up for retirement depends on two things: your income and your spending habits.

Now, spending habits are often a matter of choice.

An individual who wants to own the latest in SUVs and replace it once every three years would obviously be left with a far smaller surplus than one who uses a modest small car.

Ditto for a family which opts for short local holidays instead of exotic foreign trips every year.

Ramping up your lifestyle too early in your working life will rob you of savings and may even leave you with a lot of high-cost loans to service.

Thus Rule # 3: Be frugal in your lifestyle.

Go easy on borrowings

If you want to retire early, go easy on loans in the early part of your life. That particularly applies to consumption loans on credit cards, personal loan and so on.

The high interest rates on these loans can deplete your wealth much faster than you can build it!

Here is a real life instance. Sandeep 34, employed in the financial industry, earns Rs 16 lakh a year.

He uses 25 per cent of his monthly income to meet credit card dues on eating out and clothes.

Therefore, while he shells out an interest rate of 16-17 per cent on servicing these loans, he is not building any asset.

After working for 12 years, his current savings amount to just Rs 10 lakh inclusive of his EPF.

Rule # 4: Pick and choose your borrowings. Don't borrow heavily to consume.

Allocate to maximise returns

How you allocate your money has a big role in deciding how much wealth you can build.

If you start early you can construct an aggressive portfolio with risky assets such as equity.

In the last 21 years, a systematic investment plan on the Sensex could have given you a 16.7 per cent return even if you have missed out best days to invest.

Over a thirty-year period, silver has given a return of 11.6 per cent annually, gold 11.2 per cent and Sensex had given 16.9 per cent. Fixed deposits managed 8.4 per cent.

If one constructed a portfolio with a mix of 60:20:10:10 in equity, debt, gold and silver, this would have delivered 14 per cent per annum.

Rule# 5: Proper asset allocation holds the key to returns.

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