Understanding The Pension Gap
It is generally considered that a person retires at 60, although if you plan to choose early retirement at 55, you need to understand the gap of at least five critical years. During this interval, you'll need an alternate source of income to maintain your lifestyle.
Step 1: Calculate the Cost of Living
Assess your financial requirements to prepare for the years leading up to retirement. While doing this, you also need to consider inflation and unforeseen expenses. These considerations will help you arrive at a realistic and well-informed financial plan.
For instance, suppose your total spending comes to around ₹6,00,000 a year, it might seem logical to think ₹30 lakhs would cover you for five years. However, a smarter approach would be to consider factors like interest earned on your savings, inflation, and unforeseen expenses.
Step 2: Build a Structured Income Plan
To support your financial needs during the five-year transition period, you need to create a well-structured income plan that aligns with your different life stages. Such a plan should cover your daily expenses, healthcare, and emergencies. But how exactly does that work? Let’s have a look:
- Emergency Reserve: Life is unpredictable, so it becomes essential to maintain 6 to 12 months' worth of expenses in savings and liquid form. These funds give you peace of mind and prevent you from sinking your investment during unpredictable crises.
- Stable and steady income flow: Even after early retirement, you'll still need a regular income flow to meet your daily expenses. That's where annuity plans play an essential role. These offer you a regular and stable monthly income, like a salary, so your expenses, from groceries to healthcare, can be handled.
- Maximise your investment: Retirement doesn't mean your money should be the same as it was earlier. You must grow your savings to beat inflation and maintain your lifestyle. Systematic investment plans (SIPs) or equity investment schemes offered by Canara HSBC Life Insurance can help you enhance your retirement wealth.
Step 3: Begin Your Retirement Planning Early
Starting your retirement planning early can significantly improve the outcomes throughout your retirement years. Even small early contributions can transform into a significant corpus.
For instance, the National Pension Scheme (NPS) is considered one of the best retirement tools. It supports you during your retirement and offers attractive tax benefits under sections 80C and 80CCD, offering you dual benefits. How? You are setting aside funds for an early retirement while simultaneously reducing your taxable income through deductions.
