A reader says, “I was planning to retire in early 2025. The markets in the last few years have been good to us all, and I was confident about retiring early (I am 45). But now, I am not so sure. I have used your robo-advisor tool for the last four years and, with its help, now have enough to retire. But this uncertainty worries me. How can I emotionally handle this and retire early?”
Markets are always going to be uncertain. There will always be some ongoing crisis or some impending crisis. We need a plan independent of market conditions that minimise the risk of a poor return sequence, especially in the first half of retirement. So here are some suggestions.
1. Have a clear post-retirement engagement plan. Retirement (early or normal) does not mean a complete cessation of work. It is a time to be even more organised, disciplined and productive. Think of yourself as running a one-person company using time as a precious resource. Use your acquired skills to help others directly or online. Create an income stream from this. One should start this process years before retirement. This may help: Increase your income by getting people to pay for your skills!
Also see: How do I plan to be productive after retirement?
Being busy is the way to ward off unproductive/irrational fears.
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2. Do not expect lower inflation in future. There is no one-to-one correlation between published inflation and personal inflation. This is because our expenses and spending patterns are quite complex. Assuming your inflation estimate pre-retirement was reasonable (we recommend at least 7%), you can perhaps reduce the inflation estimate post-retirement by 1% (i.e. set it as 6%)
3. Do not expect past returns in future. Sadly, there is an approximate correlation between published inflation and expected returns! So, never estimate future returns based on past estimates. And do not forget tax!
4. Have ample health insurance. Do not forget health insurance premiums and the increase in premiums in annual expenses. The increase could be quite sharp every few years.
5. Have a large emergency fund. It should handle anything and everything unexpected – from appliances breaking down to health issues. Remember that electronic items like mobiles, laptops, and TVs need changing every few years. This is where an additional income stream can make a big difference.
6. Do not invest too much in equity! Just because you wish to retire early does not mean your portfolio should have high equity exposure. The earlier you retire, the lower the risks you can afford to take. We recommend not exceeding 40%. For precise recommendations, use the freefincal robo advisor tool.
7. Use a multi-bucket strategy with guaranteed income for several years to mitigate the sequence of returns risk. For the first 15 years of retirement, our robo-advisor tool recommends at least 15 years of inflation-index income in a zero-risk cash bucket. Most early retirees would disagree, but we believe in the power of safety, especially when quitting early.
Here are some illustrations:
- Retirement plan review: Am I on track to retire by 50?
- I am 30 and wish to retire by 50; how should I plan my investments?
- Can I retire by age 55? Retirement Planning Case Study
- Case Study: Achieving Financial Freedom for Early Retirement
- How should I plan if I want to retire in 20 years?
- Is it possible to combine a bucket strategy with income laddering after retirement?
8. Use a single pension for income flooring or laddered annuities to reduce sequence risk further if your corpus allows it (these options would naturally increase the corpus required to retire early. Both options are available in the freefincal robo advisor tool.
9. Use a well-diversified portfolio to minimise concentration risk. Even di-worsification (many funds from the same category) is acceptable as the corpus would be large.
10. Stop chasing returns, themes and “bright” ideas (if you did that pre-retirement). The time to experiment is over. Avoid investing in anything new that you have not experienced before.
Finally, do not assume you can DIY your retirement corpus all alone. Ensure your spouse knows all financial details. You can also engage a SEBI-registered flat fee-only financial planner to offer guidance and take over from you if you cannot.