Planning Early Retirement in India? Do you know how much you need

How much do I need to Retire? That is undoubtedly the million-dollar-question (by the time I will retire it would be billion-dollar-question, billion with a B). It is the hottest topic in personal finance blogs these days. Yet, another way I ask myself this question is, “How little do I need each month to live after I retire?”  This slight variation in how I see the issue that changes everything I need to do before I retire. Also, it does also give me much more variate answer than just investing up in mutual funds. 🙂

If you have recently visited any news article with young couples, or individuals claiming early retirement, and are not sure how do they do that, read the above statement again.

Still, if it does not make sense, let us get into details,

“Earlier (or at least for the previous generation), retiring at the age of 60 ( or else what government norms were set for) was considered a reasonable statement. This didn’t come from a financial standpoint but from the health perspective. Retirement was not defined by how much you needed, but could you work any longer.  People were easily able to save enough by that age, and the only reason to retire for them was to look after their health.”

But not now. People have been going out for retirement at much younger ages, say 50-45 or even in their 30’s.

So how did has this changed? Well, retirement is now called on your saving that can generate returns equal to your expenses. So now, people don’t want to work until you can’t. Once you build in your retirement corpse, you can claim your retirement whenever you want. Even multiple times if you like to.

The golden rule of early retirement

“You should withdraw your retirement funds each year and virtually never touch your original investment. It is like you should be able to live on your investment gains, aka money your money is making each year without making a cut in itself.”

But nowadays, those investment gains should be more than what you need. Why? Because of damn inflation (if not increasing taxes).

So suppose after retirement your buddy (retirement fund) is able to generate gains of Rs 5 lakh for a particular year, and you use it all. Thus your original investment value remains the same. Counting the inflation, you will need more next year(if not very next year, but in 2-3 years). While your investment returns would still be Rs ~5 lakh, your expenses amount might be 5.5 lakhs or more, which is higher than the original gains.

This would mean taking 50K from your original investments. So you need your money maker to generate returns that certainly can keep you happy + take care of bloody inflation.

So how does your money maker needs to deal with it? Simple, you make sure:

  1. Your investment returns are more than inflation.
  2. Your withdraw rate is less than your actual returns (investment returns – inflation).

In India for the last 10 years, (2008-2018), inflation has been around 7% mark, while average stock market returns are about 16%. This gives you a high 9% investment rate to enjoy.

**ps: Do not expect this numbers to remain same after 50 years, please prepare for a buffer and keep a track each year.

How to build your early retirement in India

So how to build corpse for your early retirement. Some people still think earning more is a key factor here. Ordinary gurus sell an idea of “high earning income and high returns investment.” But often traditional market high return investments come with high risk. So do you think earning more is really the most critical factor here?

But no, it is not even the second most important one. The retirement portfolio that you need exclusively depends on how much you are saving and how much are your expenses.

For those who already follow the topic of personal finance and early retirement must have been known to the widely popularized post of Mr. Money Mustache, The Shockingly Simple Math Behind Early Retirement.  For those who have yet not asked themselves how much they need to retire, or have not given much thought to it, let us drive that path today.

Increase your savings and decrease your expense and you can indeed speed up your retirement journey.

If your living costs are low, you will need a smaller retirement corpus to create that final value. And thus will require less no of years to achieve it. If your expenses are high, then not only your retirement corpus would be high, but it will also need a high saving rate to counter the adverse effect.

Let me explain you with a small example of a married couple having different expense needs wants to plan their retirement.

Let us say we have a 30 something couple that is earning 12 Lakh(s) per annum and 6% annualized ROI (Returns – Inflation).

**Case 1

 

 

 

 

Saving rate is 16% (~192,000 natural no for schemes provided by the government for tax deductions). This would require them to work for 31.5 years (quite like a typical 60 years retirement plan of 1990’s)

**Case 2

Now, let us say if they reduce their expenses and increase their savings rate to 32%

This would mean they can soon retire in 19.6 years or an about 50 years of age.

What if they are able to increase this to 50% of their take-home income? In that case, they can plan to retire early in 42. Hope you are getting the point now.

 

 

 

 

With increasing their saving from 16% to 50%, they have saved themselves 20 years of work free life. Well, it might be practically impossible to not work for such many years, but 20 years of do-what-you-want stress-free life is what they have achieved.

Just because you retire doesn’t mean you have to stop doing things that generate extra income.  It just means that you don’t have to work unless you really want to.

Does Higher Paycheck Make you retire early?

Now coming back to the common myth where people assume that by earning more, you can find your retirement early. Well not indeed, and here is an example.

Let us now consider the same couple earns 24 lakh(s) (double than earlier), but still have the same saving rate of 16%.

As you can see, it still takes them the same 31.5 years to complete their retirement. Why, because with the increase in their income they expense also got increased.

A key point to note here is we are not talking about expenses here, we are talking about expenses ratio and saving ratio. For a 12L couple expenses could be average home rent, and a regular dine-out, with the 24L couple, these could still be 50K EMI with each year expensive vacations. Having higher income does not mean having higher savings, it does also open up much more options of expending it.

The most significant factor in how much you need for retirement is how much you spend.

Another option you can choose is to set up passive income streams, which will not have fixed returns but require decidedly fewer efforts to manage and offer you the same free time as retirement.

A couple of quotes from Mr. Money Mustache post
1. If you are spending 100% (or more) of your income, you will never be prepared to retire, unless someone else is doing the saving for you (wealthy parents, social security, pension fund, etc.). So your work career will be Infinite.
2. If you are spending 0% of your income (you live for free somehow) and can maintain this after retirement, you can retire right now. So your working career can be Zero.

But is the initial money management only needed before retirement? Early retirement also brings in other challenges which can be similar to old age retirement. Given the more significant period of time, you will be enjoying your early retirement, you also need to make sure you have all the proper measures set up to avoid going back to your working life.

AN EMPTY MIND IS A DEVIL’S HOME. If you are not sure what you want to do after your early retirement, you could expect yourself to do things you don’t need to. Like taking too many vacations (visiting new places on earth), picking up your expenses and get them out of control.

Few Investment Mistakes to be avoided After Retirement

  1. Not taking full advantage of Tax Savings.
  2. Not developing an emergency savings fund before investing in the retirement fund.
  3. Not managing Short-Term Goals or keeping a substantial amount aside which is readily available.
  4. Getting lured by retirement planning schemes which often charge hidden fees and high risks.
  5. Still dragging your old debts along with you.
  6. Not maintaining a sufficiently diversified investment portfolio.
  7. Investing heavily in equity without focusing on income generation.
  8. Not Planning to Leave Your Financial House in Order Upon Your Death.
  9. Not having enough Insurance to Cover Contingencies.

Why I still think this strategy is far cry than reality for early retirement

So whenever I meet someone who plans to retire early and has a set target to achieve as retirement corpse, I do like to ask them “is your number really safe?”. I do not have many experiences towards global recessions, but in 2008 we had one of the worst recessions in history and the stock market lost 50% of its value. And I also understand that the Black Monday of 1987 and the Great Depression of 1929 created far more problems than 2008.

The second factor that makes me fear early retirement is that you can’t blindly trust government policies always to go safely. Quick links for the crisis in Zimbabwe and Venezuela.

Given these events, it is tough to estimate required inflation, and thus I call myself to focus for financial independence, but not for early retirement. Now, a lot of individuals can argue that they would go back to work if it really got bad. But again, finding a decent Job in 2008 (if not counting the depressions of 1987) was really not easy. They would also need to feed in the years of a gap that they took while would mean not keeping up with technology or any other advancements of their job profile. It will be like that when they need the job most is when they will have the most difficulty reentering the workforce.

Everybody must answer for themselves, how much will be enough for their retirement. Retiring with a whopping 1 crore might be really good today, but there is no reason to have a guarantee about it after 20 years. The purchasing power of Rupee reduces over time due to inflation which is subjected to change.

Let me know in comments are you if you are planning for your early retirement. And if so, what measures have you taken up to achieve that.