The other day in the class on investment that I take, a student asked an interesting question – “Sir, is there an early retirement plan?” What he wanted was some sort of LIC policy where he would pay a premium of a few thousands every month and then he could look forward to retire in his forties!
First of all – what is retirement? I would like to define it as that point in my life where I can afford to do what I want to – a business, follow a hobby, travel, sit at home and catch up on my reading, etc. So, when can one retire?
When your passive income is higher than your expenses.
This is really important. Passive income is that what you earn other than your salary. It could be:
- Returns from investment in mutual funds
- Interest from FDs.
- Long term capital gains from sale of residential property
- Income from a side business that you’ve developed using some skill of yours.
Having a job is very important. However, it is really tax inefficient as you pay (depending on your level of income) almost 35% of your income as taxes. Whereas even if you have a small business, you can claim expenses and the tax outgo will rarely exceed 15 – 20% of your income.
Long term capital gains – through investment in shares or mutual funds and real estate (held for 3 years) – is one of the smartest ways to build wealth. You pay nothing or at the most 20% in taxes.
This also means investing in Fixed Deposits should be avoided – the interest is added to your income. Also, anything with the word ‘Pension’ in its name should be avoided – all pensions are taxed.
The strategy from a very young age should be to invest in such a way that the earnings either do not attract any tax, tax at a concessional rate or where you can deduct expenses from the earnings.
Give it a serious thought.
Early retirement beckons!!
I retired early for health reasons — my company was sick of me and I was sick of them.
— Unknown wise person
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