Retiring early reduces your earnings, retirement benefits and cause underutilization of your talents.

From a broad or macro-economic perspective, India’s working population creates value for the economy in terms of producing goods and services that can be traded for money. It also shoulders the burden of providing for retired pensioners as well as contributing to the public welfare of the country. While retiring early has become somewhat of an ideal that millennial strive for, there are several downsides that need to be considered.

Here’s why retiring early, without a clear purpose or vision, can cause more harm than good.

Retirement Benefits

Let’s consider the numbers. If you retire at 40, you could be giving up compounded returns on 1/3rd of your productive career. With minimum pension being Rs. 9000 per month currently, the quantum of retirement funds sacrificed, due to early retirement, is substantial. Even if you opt for commutation or surrender of pension in exchange for a lump sum consideration, the difference will be impossible to make up for.Benefits such as gratuity may also be subject to higher Tax Deduction at Source (TDS) if you do not opted for staggered payouts.

Lower lifetime income

Your net take home salary apart, you may also be eligible for other benefits such as Group Medical Insurance, leave travel allowances, medical reimbursements and Dearness Allowance (DA). If you’re a government employee, you may also be entitled to free accommodation and other benefits. On opting for early retirement, the average cost of living goes up. This is especially true if you live in a metro city as compared to a small town.

Underutilization of acquired skill

It is a well known fact that Human Capital is the most critical factor that makes all commercial activity possible. Unlike a sabbatical, retiring early negates the investment you would have made in professional education and training early in your account. To earn a credential like MBA from a premier institution, you may end up spending the equivalent of 3-4 years worth of gross annual income. Premature retirement precludes the possibility of getting better returns on investment.The lost opportunity cost, in terms of advancing career prospects and gaining recognition, is unquantifiable.

Tax liability

If you opt for voluntary retirement, you may have to pay considerably higher taxes depending on the lump sum amount you get on leaving service. Income tax is applicable on benefits such as gratuity, leave encashment and accrued bonuses that are paid on a consolidated basis. Also capital gains from the sale of assets like Employee Stock Option Plan (ESOP) also attract Capital Gains Tax according to tax bracket you fall into.

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The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.

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