How to retire at 45
Gokul, a dynamic 32-year-old project manager at a prestigious IT firm, has charted a clear course for his future: early retirement at 45. His vision extends beyond the confines of his corporate career, and wants to start his own blog.
At the heart of his plans is his family – his wife, who manages the household and their five-year-old son. As the sole breadwinner, Gokul brings home a monthly salary of Rs 1.2 lakh, which comfortably covers their monthly expenses of around Rs 80,000 and leaves enough room for life’s little luxuries. But given his circumstances, can he afford to retire early? Let’s find out.
His son’s higher education
Parents want to provide their children with the best education they can. And Gokul is no different. He wants to allocate Rs 15 lakh for his son’s higher education. However, given the average inflation rate of 6 per cent in India, the same Rs 15 lakh course will likely balloon to around Rs 32 lakh in 13 years.
Fortunately, Gokul has the means to cover this cost, as he has accumulated Rs 7.5 lakh in a few tax-saving mutual fund schemes . This amount will grow to the desired amount by the time his son gets out of school, assuming his investment increases 12 per cent each year.
Calculating retirement corpus
Since Gokul has a monthly expense of Rs 80,000 and wants to retire by 45, he’ll need to save a little more than Rs 5 crore. We arrived at this figure based on three assumptions:
- That he and his wife live until 85.
- The average inflation rate in their post-retirement years is 6 per cent.
- That they ensure their nest egg (roughly Rs 5 crore) grows at 9 per cent during their retirement years.
A Rs 5 crore retirement kitty is a formidable sum to accumulate in the next 13 years, but we dived head-long to see if this can be achieved. When we pored over Gokul’s current investments, we found he has a provident fund of Rs 7 lakh, and a monthly EPF contribution of Rs 7,200 – an amount matched by his employer.
Assuming EPF grows 8 per cent each year and Gokul’s monthly contribution rises 10 per cent, he would amass Rs 60 lakh by age 45. In addition, he should put his savings to work for him. Since he’s saving Rs 40,000 each month, it would be ideal if the money is invested in one or two flexi-cap funds, which are diversified equity mutual funds .
That’s not it. (The ambition of retiring early comes with a price attached, after all). Gokul will have to step up his investment by 10 per cent each year. If he can successfully do this and the flexi-caps annually grow at 12 per cent, he’d build a Rs 2.19 crore corpus. But even then, Rs 5 crore seems like a long shot.
If Gokul and his wife can put the squeeze on their monthly expenses by just Rs 10,000 each month, it will work wonders on two fronts:
- His retirement corpus will reduce to Rs 4.38 crore.
- He can start investing the additional money he saves in flexi-cap funds . Meaning, he can start investing a total of Rs 50,000 every month.
Do this, and he retires by the age of 45! Combining the EPF and flexi-cap money will help Gokul achieve his retirement target.
The magic of equity
Gokul should invest in flexi-cap funds stems from the time-tested theory of equity being a true wealth generator in the long run. Contrary to popular belief, the risk quotient of equity flattens over the long term. ‘Long term’ is the key here.
On the other hand, if Gokul invests in debt-oriented funds, it would be an uphill task – a polite term for impossible – to scale his retirement peak.
Once Gokul retires, it is important to transfer a certain portion of his money from flexi-cap funds to the more conservative debt-oriented fund. Because, during retirement, capital preservation is of utmost importance.
Having said that, he shouldn’t go overboard with debt-oriented funds. He still needs to keep 35-50 per cent of his money in an equity fund. Flexi-cap remains a good option even at this point in time. This will ensure his retirement nest egg doesn’t exhaust during his lifetime.
Last but not least, Gokul should watch his withdrawal rate. Limiting annual withdrawals to 4-6 per cent of the retirement corpus will eliminate risks in future.
Keep in mind
- Gokul should have life insurance and medical insurance. Consider critical illness riders.
- He should have an emergency fund that covers six months of expenses. For this, use a combination of a liquid fund and a sweep-in deposit.