How to retire at 40 with Rs 50 lakh! Explore Public Provident Fund+Post Office TD+RD+KVP
How to retire at 40: Everybody wants to enjoy a relaxed life or live on their own terms. Some millennials plan to retire early. So much so that retiring at 40 has become a goal for many. Is this really possible?
Everybody wants to enjoy a relaxed life or live on their own terms. Some millennials plan to retire early. So much so that retiring at 40 has become a goal for many. Is this really possible? Of course, it is, if you can ensure you have enough financial resources at your disposal at the age of 40, so that from then onwards you can pursue your own interests or hobbies, instead of being in a regular job. To make this happen, you will have to make a solid financial plan - that is not fraught with risk, and the return is guaranteed.
Financial Planners will advise you to have a diverse portfolio, invest a good sum in Mutual Funds and stocks. Even as the returns would be likely higher, not all youths want to get into these. So, how about a simple plan, that has no risk and can help you easily retire at 40 with a fund of over Rs 50 lakh (5 million)?
Here is a suggested plan for a 25-year-old youth, who has just got into jobs, plans to play safe and not much interested in understanding the nitty-gritty of several financial products.
If you start working at the age of 25 and your annual salary is, say, Rs 6-7 lakh, it won't be very difficult to save Rs 16,000-17,000 per month (around Rs 2 lakh, or 1/3rd of your salary). If you can manage to do that, your dream of retiring at 40 would certainly come true.
You need to ensure that every year you manage to save Rs 2 lakh and invest that, as suggested below, in tax-saving instruments like PPF and Post Office 5-year Fixed Deposit. These are government-backed, easily available plans in all parts of the country. Now follow these steps:
- First, open a Public Provident Fund (PPF) account with any bank of your choice. Invest Rs 1.5 lakh per annum in the PPF account for 15 years. At the current rate of 8.1 per cent interest, your annual disciplined investment would turn into a total fund of Rs 46,75,910.00 when you turn 40.
The PPF investment and interests are not taxed. So every year, you will be able to save tax on Rs 1.5 lakh. As you will grow in your job, your salary would also grow with time. However, with increasing family responsibilities, the rise in your salary may not mean you can save more. Moreover, you will need to buy accident and health insurance policies to ensure your family is not in trouble when something bad happens to you. So let us stick to the Rs 2 lakh/year plan.
- Divide the remaining Rs 50,000/year into 12 parts (around Rs 4166 each) and invest them in a bank Recurring Deposit (RD) account. Suppose you do it with HDFC Bank, you will have saved Rs 51,988 in a year. At the end of the year, invest this money in a Post Office five-year Time Deposit (TD) plan, which is offering 7.8% interest rate at present. At the end of five years, this Rs 51,988 will grow to Rs 76,498. At the end of the fifth year, you can reinvest this money in Kisan Vikas Patra (KVP) offered by Post Office. KVP is offering 7.7% interest rate at present. Your money would double in 112 months (9 years and 4 months). That means, at the end of 15-years, you will have an additional Rs 152,996.
In the second year, you can again open an RD and invest Rs 4166/month. At the end of the year, put the entire savings in a five-year Post Office FD scheme. You will have another Rs 76,498 after five years. Suppose you repeat this exercise for four years, at the end of 10 years, you will have additional Rs 76,498+Rs 76,498+Rs 76,498+Rs 76,498 = Rs 303,992.
After 10th year, you can stop investing this Rs 50000/year, and instead, use this amount for other purposes.
By the time you reach 40, you would generate a total fund of Rs 152,996+Rs 303,992+Rs 46,75,910.00=Rs 5,132,898. While your total investment would be just Rs 50000x5+Rs 150,000x15 = 25 lakh. You will save tax, and remain worry-free about the final return. Out of Rs 5,132,898, you will not have to pay any tax for Rs 46 lakh!
Note: This is a simplistic explanation to show retirement at 40 with financial security is possible. You can explore more about financial products, or even consult a certified financial planner.
*Official calculators provided by leading banks' websites have been used to arrive at the numbers, which may vary if you actually start investing at the age of 25.