14.08.2024

HOW DO I ENSURE EARLY RETIREMENT WITHOUT RELYING ON THE STATE PENSION SYSTEM?

Early retirement is a dream of many people. Everyone has heard stories of people who managed to accumulate wealth before they were 50-60 years old and even before they turned 40 and retired early. However, these stories sound to us more like they were taken out of a movie than from the reality around us.

Under the pressure of a hectic daily life, between the costs of a home, bills, food, children and what not, most people cannot imagine that early retirement is possible. But with a good plan, early retirement beyond what the law provides is not only possible, but even easily achievable.

In order to achieve early retirement, by saving and not paying the pension insurance provided by law, you need to take three very simple steps, advises the economist and lecturer at the Finance Academy, Georgi Vuldjev.

First, you must decide to take your financial future into your own hands.

This means not relying solely on the state pension system to provide for your old age. This decision seems more difficult than it really is. The reality is that our current pension system is not sustainable in the long term. The likelihood of people who are in the early stages of their working careers getting a decent pension from the state is not particularly high.

So anyway, it is highly recommended that everyone save separately, apart from the money that is withdrawn monthly for pension insurance.

Of course, you should be aware that early retirement means a lower state pension. But that shouldn't bother you. First, it's low anyway, and second, if you plan your savings correctly, you'll accumulate enough money that it won't matter.

The second step is to start saving!

This is also the most important step. It is easy to implement with good income and expenditure planning.

Think of your personal life as a business. Because every business and every person has income and expenses. Good businesses are those that make a profit, i.e. whose revenues are higher than costs. And the best invest their profits. These are the businesses that achieve the fastest growth and dominate their sector.

This is exactly what each one of us should do - to make a profit, that is, savings, in our personal life, which we can invest for the purpose of financial growth!

First and foremost, it means doing everything you can to maximize your earnings. This aspect of personal finance is highly individual, depending on what your education and professional qualifications are. Keep in mind that they can always improve! Seek to acquire new knowledge in areas that have direct applicability to your professional life. Second comes the cost.

Maximizing revenue alone will do nothing if we don't control our costs. Appetite does come with eating, and this is especially true in the realm of personal finance. If you don't plan your savings, they won't come by themselves, even if you have a high income. Therefore, first of all, you should start tracking your expenses, prioritize the most important ones and save on the less important ones.

By maximizing income and minimizing expenses, you will begin to accumulate savings. The simple math shows that with an adequate level of savings, early retirement is a completely achievable goal. At a minimum, each of us should save 10% of our net income, and for early retirement purposes, it is highly recommended that the level be 20%, and even more if possible.

By saving 20% of your income and investing that money in such a way that it yields an average of 8% return per year (which is totally achievable) for up to 20 years you will be able to generate a retirement income equal to 80% of your professional income that you have saved from over the years. This is a very high level of income replacement that no pension system can guarantee you.

The stated return is not some unattainable goal. For example, over the past 20 years, the average return on the SP500 stock index has been around 10%. That is, if in 1991 someone started investing 20% of his income, in 2021 he would have reached the goal of retirement after 20 years of savings.

Of course, "early" retirement requires saving early. In investing, the most valuable resource is time, and the more time you have, the more you can achieve as an investor. It is therefore highly recommended that saving for early retirement starts early in one's career – someone in their 50s is not yet in a position to save and invest for early retirement. Someone 25 years old or even 35 years old, however, is.

Early retirement is completely achievable for every single person, as long as he puts in the necessary effort and, of course, has the necessary knowledge. This includes knowledge about how to manage our personal finances and save, and how to invest those savings as wisely as possible.

The investment and personal finance program at Finance Academy Bulgaria is aimed at helping people learn to save and invest effectively, with the aim of achieving long-term financial security.