This article was published in The Hindu Business Line on 29 Jun, 2015
Repaying loans early, moving to cheaper cities and using tax breaks can help you retire early
Can you retire before 60? Well, the answer depends on your ability to live on your passive income. Passive income is any income earned without working. This could be interest income, portfolio income, dividend or rent. Here are a few strategies to get there.
Repay your loans faster
Most people carry their home loans and other loans for the full repayment period, usually 15 or 20 years. However, if you are smart and have the motivation to retire earlier, commit to put 50 per cent of your annual bonus amount as pre-payment of your home loan.
Of course, bonuses are subject to business results being good that year. But even if you commit half of this amount towards paying the home loan, the results can be positive.
Rohit, 40, has a ₹30-lakh home loan on his flat. He is paying an EMI of ₹32,000 for 15 years. He earns ₹10 lakh as salary and a bonus of ₹2 lakh a year. Let us assume he commits 10 per cent more every year, which is possible due to salary raises. Even if he commits only half of this bonus towards pre-payment, Rohit will be able to become debt-free in just nine years.
Two, you can move to a smaller home as children go away to either study or work. This will release money, which will fund your retirement corpus, allowing you to retire earlier. Or this money will help prepay the home loan that you are already servicing.
Three, you can retire to a cheaper, preferred location like your hometown. Many professionals are exercising this choice nowadays, after working for years in big cities.
Selling an expensive home to buy a cheaper home in smaller town releases money for retirement corpus. This can lead to a significant cash-flow increase immediately as the smaller town is usually cheaper to live in too. The price of goods and services too, is often cheaper by 15 per cent or more.
Re-evaluate monthly needs
If you wish to retire, you need a retirement fund that lasts through your old age. This is the sum total of retirement assets such as EPF, PPF, FDs and other savings that you have accumulated. How big this fund should be depends hugely on the monthly living expenses.
Singh, 40, has household expenses of ₹50,000 a month. This comprises groceries, utilities and maintenance, transport and entertainment expenses. He would roughly need ₹1.5 crore in a retirement fund to be able to retire comfortably.
Let us say that with Singh’s current income, this figure can be attained only by the age of 60. But if he reduces his monthly expenses by ₹15,000 (say ₹7,000 by way of petrol/driver expense and ₹8,000 through trimming entertainment expenses), the corpus required reduces to ₹1 crore. This can certainly be achieved by the age of 56. After peaking at age 50, household expenses for families generally reduce.
Be a tax-efficient investor
Taxes eat away a significant part of your future retirement fund. There are benefits given by the government for salaried people to save for the long term and to secure their future. The key ones are under Sec 80 CC and 80 D.
Section 80CC offers a maximum benefit of ₹1,50,000 a year towards home loan interest, LIC premium, savings in PF and children’s fees. Section 80 D offers a benefit of ₹25,000 per annum for medical insurance.
Suppose there are two salaried employees — Anil and Sunil; both 30 years old. They earn ₹10 lakh a year as salary. Anil is smarter and avails of the tax breaks. Sunil is blissfully unaware of these.
Suppose, Anil uses his tax breaks to the full, he will invest ₹170,000 in the above instruments and take home ₹8.9 lakh. Assume Sunil uses no tax breaks, he will take home ₹8.56 lakh.
If Sunil saves 10 per cent of his salary (₹85,000 a year) in mutual fund SIPs yielding 15 per cent return over the long term. Anil does exactly what Sunil does and also adds his tax savings to this contribution. The results again are amazing. While Anil will end up with ₹5.40 crore at 60, Sunil will have only ₹3.60 crore.
Anil can retire even in his early fifties with ₹2 crore to his name. Better tax planning has helped him finish far ahead of his peer despite both of them earning the same amount!
Retiring early is not a pipe dream. This can be done with careful planning and implementing the above strategies.