Perhaps one of the most daunting facts about deciding to retire early is saving up enough for the future. A lot of people tend to delay the age at which they would like to retire primarily because they are unsure of their capability to build a sustainable nest egg.
Starting early is essential to realizing the dream of an early retirement. The most obvious choice for most people who plan on retiring early is to invest a significant sum of money in the stock market and creating a diversified portfolio. While the returns from these investments are high, there is also a risk of losing out.
However, a fairly simple alternative, with practically zero risk, does exist—government-run savings schemes. Starting early does give you an added advantage to building a substantial corpus for life post retirement, but even if your planned retirement age is 10 years away, it is still possible to achieve your goal. Ideally, you should be investing 30% of your salary in savings schemes.
But why should you invest in savings schemes like the fixed deposit or the PPF?
- Fixed returns: Since the returns on these schemes are fixed beforehand, the market conditions have no influence on your earnings.
- Zero risks: As an investor, your money is immune to any kind of defaults or loss of capital since the schemes are backed by the government.
- Revision of rates: The rates on government savings schemes are revised every quarter. This results in higher returns.
- Tax breaks: Investments made in government savings schemes are eligible for tax deductions under Section 80C of the Income Tax Act, 1961. You can claim up to Rs.1.5 lakh as tax deductions for investments made in small savings schemes.
- Low investment amount: Investments in government savings schemes can be started with very small amounts. For example, a minimum amount of Rs.500 per year is all that it takes to keep a PPF account active.
Here’s how you can begin with your investment:
Public Provident Fund (PPF): To invest in the PPF, you have to make a minimum annual contribution of Rs.500. The maximum amount that can be invested in a year is Rs.1.5 lakh. Anything above this amount does not earn interest. At present, the rate of interest for PPF deposits is 8.0% p.a. (Compounded annually). The PPF also has a lock-in period of 15 years. Assuming you invest Rs.1.5 lakh per year for 15 years, with an interest rate of 8.0% p.a., compounded annually, your investment will have grown to approximately Rs.49.76 lakh when it reaches maturity. The interest earned and the amount invested is completely tax-free. For more information about PPF click here.
Recurring Deposit (RD): RDs are a great option for short-term savings goals. Furthermore, the interest rates currently range between 6.25% and 7%. An RD with a 1-year tenure is a good way of saving a tidy sum that can be invested in other government-backed small saving scheme.
Post Office Time Deposit (TD): The Post Office TD comes with 4 tenure options: 1, 2, 3, and 5 years. The scheme permits you to make only one deposit during the entire tenure of the scheme. Additionally, there is no upper limit on the amount can be invested. The current interest rate for a 5-year TD is 7.8% p.a. So if you invest around Rs.51,000 in a 5-year Post Office TD (say the maturity amount invested in the RD earlier) your investment is likely to grow to approximately Rs.76,000 on maturity.
Kisan Vikas Patra (KVP): The KVP is another Post Office savings scheme that has no upper limit on the amount that can be invested. This is also a one-time investment scheme that has a tenure of 112 months. The amount invested doubles at maturity. Assuming the maturity amount from the investment in the Time Deposit is reinvested in the KVP, at the end of 112 months, you will receive approximately Rs.1.52 lakh.
Since the Post Office TD and the KVP are one-time investments, you could consider opening a second RD to save up for a Post Office Fixed Deposit.
Post Office Fixed Deposit (FD): Similar to the TD and KVP, there is no limit to the maximum amount that can be invested in a Post Office FD. The interest rate for a 5-year FD is currently 7.40%. Assuming the same maturity amount from the previous RD was invested in the FD, at the end of 5 years you are likely to have an additional Rs.76,000.
Investments in the KVP, TD, and FD can continue for a period of 10 years from the initial investment, i.e. 2 to 5-year investments in the Post Office FD and KVP. When the FD reaches maturity, the total amount from all the investments is likely to be approximately Rs.51 lakh. Since there are a number of tax breaks for such investments, of the Rs.51 lakh, Rs.46 lakh will be free from any taxation.
Apart from these investments, during the entire course of your employment, 24% (12% of your salary and 12% contribution from your employer) of your earnings have been going towards your Employees’ Provident Fund (EPF). The current interest rate for the EPF is at 8.55% p.a. At retirement, this amount can be withdrawn.
If your finances are planned well and your investments in low-risk, tax-saving instruments are made early on, the dream of an early retirement is not as far fetched as you might assume.
This is a Guest post by Kruthi Sharma, We have not received any monetary benefit for publishing this article. The content of this post is intended for general information / educational purposes only.