A reader says, “I am 47 and have a wife and 15-year-old daughter. I have my own house, and I am paying one lakh emi. The balance loan is 1.4 cr. I have been considering resigning from my current job and, depending solely on my corpus, investing primarily in FD, mutual funds, and some stocks.”
“I have 2.1 cr of FD, 2.2 cr of mutual fund and 1.4cr of stocks. No EPF. With this 5.7Cr corpus, can I retire? My monthly expenses are three lakhs, including home loan EMI.”
Off the cuff, early retirement seems unlikely. Your lifestyle is pretty expensive, you have a significant home loan balance, and you must pay your daughter’s college fees in 2-3 years.
Note: This retirement planning illustration depends on several inputs and assumptions. Not all of them are shown here. The individual must change these inputs and assumptions according to their circumstances. Please do not use these illustrations as a framework or copy these numbers for personal use without a proper calculation.
- Assumed life expectancy of younger spouse 90 (I have assumed both are 47 for this illustration)
- Inflation during retirement (%) 6
- Years to retirement 0
- Monthly expenses in the first year of retirement: Rs 2,00,000
- Years in retirement (until younger spouse reaches age 90) 43
- Corpus available: Rs. 5.7 Crores
Results:
- Corpus necessary to provide inflation-protected income for the first 15Y in retirement: Rs. 4,21,52,673 This amount includes an emergency corpus for about 36.5 Lakhs
- Corpus necessary to provide inflation-protected income after the first 15Y in retirement to the remainder of your lifetime Rs. 3,45,12,765
- The total corpus required, therefore, is Rs. 7.66 Crores
- The shortfall is 1.96 Crores.
Verdict: You are not ready to retire even if you account for your emi and daughter’s education with separate funds.
Why do you need Rs. 7.66 crores?! The freefincal robo advisor ensures the retiree’s corpus does not get eroded too soon because of a poor sequence of returns. This is why it ensures that the first 15 years of retirement are guaranteed with a near-zero risk investment from which an inflation-indexed income can be drawn.
- This income bucket requires Rs. 4,21,52,673. This amount includes an emergency corpus of about 36.5 Lakhs.
- The overall equity allocation for the rest of the corpus is only 30%. We do not go overboard on equity just because the retiree is young. The remaining corpus is invested in the following manner.
- A low-risk bucket with 25% of the remaining corpus for income from year 16 to year 26 in retirement. The low-risk bucket will have an asset allocation of 50% equity and 50% debt during the investment period (years 1 to 15 of retirement).
- Corpus from a medium risk bucket with 15% of the remaining corpus will provide income from years 27 to 35 in retirement. This bucket shall have an asset allocation of 70% equity and 30% debt during the investment period (year 1 to year 26)
- Corpus from a high-risk bucket with 7% of the remaining corpus will provide income from years 36 to 43 in retirement. This bucket shall have an asset allocation of 100% equity during the investment period (year 1 to year 35)
- The buckets will be actively managed to reduce risk during this investment period via rebalancing and profit booking from one bucket to another. To understand how this works, try The Retirement Bucket Strategy Simulator.
- After 15 years, the low-risk bucket will be turned into 100% debt and provide income for about 10 years. After that, the other buckets will also be progressively used.
We realise that this is not the answer the reader wants to hear, but the ground reality is that it is too risky to retire early when expenses are high. We suggest postponing retirement until the home loan is paid off and the daughter is settled. Even then, having a secondary source of income from consulting and freelancing, etc., will be crucial.
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About The Author
Dr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.
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