Can I retire with Rs. One Crore at age 40?

Last Updated on February 12, 2022 at 6:26 pm

A reader asks, “I am 39 yrs old. I am planning to take early retirement in the next 15 months. I have a savings corpus of 1 Cr INR. My monthly requirement is 50 K INR. I need help with two things: 1) advice if this can be done  and 2) If yes, then investment guidance to achieve it (how can I invest this big amount with safety)”

While regular readers may know the answer to this, what follows is a simple explanation for beginners. First of all, it is important to appreciate that retirement planning is a complex problem and requires extensive introspection and DIY research or professional advice from a SEBI registered fee-only financial planner. Scanty information such as the above may be enough to write a cautionary article such as this but is not good enough to offer personalized investment advice.

The reader must first appreciate two important aspects of retirement planning. The monthly amount we require after retirement is, in reality, the monthly amount required in the first year of retirement. We need to increase this income by at least 5-6% each year to keep pace with inflation.

If income increases each year, we cannot lock all our money away in safe assets. Yes, a good chunk of it will be used to receive a regular income, but a portion has to be invested to provide the higher income. So “investing with safety” is an oxymoron if you want the principal to be undisturbed.

At age 40, an annuity plan at 6% interest (before tax) that provides a monthly pension of Rs. 50,000 (before tax) is just about possible. However, we will not be able to accommodate even a small increase in regular expenses. Emergencies, particularly those related to health, can be an even bigger problem. The annual premium of a comprehensive health cover must be considered while planning for retirement. Note that this refers to the premium after retirement. So the current premium should be suitably inflated by at least 10% each year.

So let us now see what the corpus required for retiring at 40 is. Trivia: it will be lower than the corpus required for someone who wants to retire 20Y from now age 60! See: Retire early to lower your retirement corpus!

We shall use the freefincal robo advisory tool for this illustration.

Assumptions:

• Time to retirement: 1Y
• Age of retirement: 40
• Years in retirement: 45
• Inflation after retirement: 5% (we recommend using at least 6%; 8% is even better, but let us first roll with 5%)

Corpus Required:  Rs. 1.7 Crores with 70% in fixed income and 30% in equity (overall) split into four baskets: income, low risk, medium risk and high risk. About 5% of the fixed income will also be allocated to an emergency bucket to handle contingencies. For example, see: I am 30 and wish to retire by 50; how should I plan my investments?

• If the inflation is set to 6%, the corpus increases to Rs. 1.95 Crores.
• Rs. 2.33 Crores with 7% inflation.
• Rs. 2.83 Crores with 8% inflation
• The recommended equity allocation will increase from 30% to 40% as inflation increases from 5% to 8%.

In summary, we think that Rs 1 crore is not enough to draw Rs. 50,000 a month and keep pace with inflation after retirement at 40. We recommend a corpus of at least Rs. 2.5 to 3 crores. In addition to monthly expenses, we should remember to buy a large insurance policy and include the future premium in the calculation.

It is important to appreciate that “early retirement” only means retirement from a salaried existence (as an employee). Only those who have established a strong secondary income source – passive or active (full time or part-time) should consider early retirement. Even if scanty and irregular, any income after retirement can make a difference to our financial independence.