Is it possible to retire early in India?

Is early retirement in India possible? Can a 45-year-old with ‘enough’ saved up, hang up his boots and avoid a full-time job for the rest of his life?

In this post, I do a feasibility study considering three different scenarios for early retirement to determine the most practical approach.

Early retirement is a phrase that has become extremely popular in recent year thanks to successful blogs like

  • Early Retirement Extreme
  • Mr. Money Mustache
  • Getrichslowly
  • The Simple Dollar

and many more that have cropped up by inspiration.

Many Indians get inspired by these blogs and seek early retirement without understanding the implications of inflation levels in India and what it actually means to a retirement plan. Some even have designed retirement calculators ignoring post-retirement inflation!

No one seems to understand how fragile their plans look on paper. So this post is to debunk some popular notions on early retirement and to provide a reasonably practical solution.

Early retirement is an extremely common dream. You long to say good-bye to your tough corporate job, tell your evil boss to f%%% off, begin an entirely new phase in your life!

Almost everyone dreams it, but only a few people decide to do something about it. Will those few succeed? How practical is it to retire early in a country where inflation is close to double digits?

Let try and answer these questions in this post by taking the case Brainy Smurf. Regular readers may recall we considered Grouchy Smurfs retirement planning with fixed and recurring deposits.

Brainy Smurf is a nerd who loves numbers. He would like to meticulously plan his retirement before quitting his job. He is convinced that with a frugal lifestyle and intelligent investing, he will be able to retire early in India.

brainy

Brainy Smurf explaining to Papa Smurf about early retirement while inflation is preparing to strike! Photo Credit: Vik Nanda

Note: Although this post considers early retirement is meant for everyone. All of us should understand why it is crucial to plan for retirement as early as possible and invest as much as possible – preferably, as much as you spend!

This is a lengthy post where we consider different scenario cash flow charts with graphs. I would like the reader to observe the cash flow charts and make their observations.

If you are serious about early retirement, you will need to spend extra time with the charts.

Let us now run through Brainy Smurfs numbers and check see where he stands.

Age at retirement: 45

Years in retirement: 45! (He assumes he will live up to 90)

Monthly Expenses:  20,000 per month.  This is much lower than most Indian households. When you reach the end of this post, recall this fact and figure out what would the situation if monthly expenses are higher than this!

Annual Expenses:  20,000 X 12 + 20,000 = 2,60,000.  We add an extra months expenses to account for health insurance, and other annual expenses. We are going to use these inputs in three scenarios:

  1. The Income drawdown strategy (decreasing corpus)
  2. The constant withdrawal rate strategy (increasing corpus)
  3. Using a perpetuity (constant corpus)
  • Accounting for the unexpected

 Scenario I: The Income drawdown strategy (decreasing corpus)

Inflation: 8%. Return expected on retirement corpus 8%. The real return  is zero. That is our annual return is equal to the average rate of inflation. Using the "how much is required to retire?" tool, we find that the corpus required is 1,17,00,00 or 117 Lakhs. Here is how the cash flow chart would pan out.

scenario-1

 

Notice how the corpus initially increases and then decreases when expenses become high due to inflation.

It becomes zero after 45 years. This is known as an income drawdown strategy. Brainy allows his corpus to grow at some rate (8% in this case) and withdraws from it each year to handle his expenses that increase each year with inflation (8% in this case).

The real rate of return =(1+return)/(1+inflation)-1 = 0%

Notice how the withdrawal rate  = expenses/(corpus value @ year start), rapidly increases.

scenario-1g

 

Myth: Withdrawal rate is a constant

Truth: Withdrawal rates are constant only if you plan for them to be so. In a drawdown strategy, the withdrawal rate cannot be constant even if inflation is assumed to be zero!

Scenario II: The constant withdrawal rate strategy (increasing corpus)

In this case, the percentage Brainy withdraws from a corpus at the start of each year is assumed to be a constant.

That is Brainy will need 2,60,000 in the first year of retirement. So assuming a withdrawal rate of 3%, he will need a corpus of 86.7 Lakhs to start with.

Notice this is considerably lower than the 117 Lakhs need in the drawdown strategy.

If inflation is assumed to be zero and for 3% withdrawal rate each year in retirement, brainy Smurf  will only need a return of 3.1% on his corpus.

His corpus will not reduce in value and will remain 86.7 Lakhs after 45 years! Since inflation is zero, the real return = return = 3.1%

For an inflation of 3%, the return required = 6.2% and real return = 3.1% for each year in retirement to maintain the withdrawal rate constant at 3%

For an inflation of 8%, the return required = 11.34% and real return = 3.1% for each year in retirement to maintain the withdrawal rate constant at 3%

This is how the cash flow chart looks like

scenario-2

The top cell in the withdrawal rate column is green to signify that it is an input. This is how the corpus grows with time.

scenario-2g

 

Lower the withdrawal rate, higher the initial corpus required lower the return.

For example, for a withdrawal rate of 5%, Brainy would need only 52 Lakhs to start with, but require an annual return of 13.7%

For a withdrawal rate of 1%, Brainy would need only 260 Lakhs to start with, and required an annual  return of 5.3%. (Thanks to Satish for pointing out a mistake here)

So he needs to find an optimum withdrawal rate to keep the initial corpus and return required low.

However is this scenario practical? Can you manage a real return of 3.1% year after year for the kind of inflation that exists in India? Many of the early retirement fans seem to think it is not such a big deal!

Have to find out what they are smoking! One could argue that a real return need not be obtained each year in retirement, and it is some kind of average after a few years.

Point taken. However, we are talking the return for the entire corpus to grow. So even if we invest part of the corpus in equity and part in debt, how practical is to achieve an average real return of 3%? This would mean much of the corpus will have to be in equity.

So a couple of bad years and Brainy would be screwed.

They also talk of something called a safe withdrawal rate(SWR). This is the rate at which one can withdraw from a corpus taking into account volatility in its growth rate and inflation. All this talk of SWR is impractical in a high inflation rate scenario.

What one needs is a Safe rate of return. That is, before we actually retire, we should plan with a volatility-free return, that can be realistically achieved year after year in retirement.

After we retire, we should divide the corpus in different buckets and allow them to grow at different rates.  Even then, the net portfolio return has to be realistic!

Resigning our job in the hope of achieving an unrealistic high net portfolio returns is madness.

Retirement math is simple.  No matter when you retire, the math is the same. It is neither shocking simple, not alarmingly complex. You do not need concepts like SWR.

Prepare for the worst and pray for the best. To assume that withdrawal rate ( = SWR) will be constant in retirement, for high inflation scenarios is plain dumb in my opinion. I will leave you to be the judge.

Scenario III: Perpetuity (constant corpus)

Perpetuity is nothing but an pension or annuity that is constant and forever. Such annuities are sold by insurance companies and last until the lifetime of the retiree.

If you want one to last forever (that is outlive you) your corpus will have to increase each year by the exact same amount that you withdraw.

Then the corpus will never diminish like it does in a drawdown strategy (scenario I), nor will it increase like the constant withdrawal rate strategy (scenario II).

When inflation is zero, scenarios II and III become identical.

Now with 8% inflation, if Brainy uses 117 Lakhs as the corpus required (same as scenario I), this how the cash flow chart pans out

scenario-3

 

The green cell indicates that corpus is an input in this case. Although the corpus is constant, notice the return required.

scenario-3g

 

Notice the return required is low initially and the rapidly increases.  Therefore, for nearly 20 years the real return is quite small and in fact negative for several years initially.

After that it is impractically large! So assuming again the idea of a perpetuity as it is defined will not work in a high inflation rate scenario.

Hey! Wait a minute, the return required for the first several years is too small. Why can’t Brainy assume a higher rate of return? He sure can!

Only that it will not become a perpetuity then.

For example. If the rate of return required is an achievable 8% (= inflation rate) for all 45 years, then you will simply reproduce scenario I. That is the corpus will reduce to zero.

If you take the rate of return is higher than the inflation for all years in retirement, you will reproduce scenario II: the corpus will increase. Again, the question of how practical this is, looms large.

Mixed Bag Scenario

What if we combine Scenarios I and III? That is choose 10% as required return for first 20 years in retirement (real return 1.85%, still a tall order but barely manageable), 8% as required return for next  years (real return is zero since inflation is 8%) and then plan for a perpetuity

. That is we choose scenario I for first 25 years in retirement and then switch to scenario III for the last 20 years. Here is the cash flow chart

scenario-4

 

The green cells as usual represent the variables. Notice that return required is now just about manageable for almost 41 years in retirement. That is a reasonably good achievement.

scenario-4g

 

Notice how the scenarios are combined. We have used the fact that the corpus grows in the initial phase of scenario I and combined it with the constant corpus perpetuity in scenario 3.

The region in scenario I when the corpus starts to decrease has been avoided. This provides a reasonably manageable scenario. The starting corpus used is the same as in scenario I: 117 Lakhs.

Scenario IV: Accounting for the unexpected

Phew! If you have made it to this point, thank you very much!

Now, all of the above are scenarios on paper. Life does not work quite like that.

Trouble with the early retirement extreme folk (including Brainy) is that they think frugality and DIY can solve all problems of life. This is nonsense.

You may want to be frugal, but life may not allow you to do so. You may think you have your expenses in control when an unexpected recurring expense can wreck havoc on your plans.

Banking on frugality to defeat inflation is dumb. Yes, frugality will help you combat inflation but you will also have to take into the ups and downs of life. I can tell you with the full benefit of hindsight that a frugal lifestyle has helped me keep expenses in check. I cannot however assume that it will continue to remain the same.

I may buy only what I need, but that can change with time!

We have already discussed the trouble with banking on real returns after retirement.

So what does this mean for Brainy? What scenario should he choose?

Brainy should plan with a drawdown strategy – this is the standard used in all retirement plans. When it comes to implementation he should choose the bucket method which in some sense a variation of the mixed bad scenario discussed above and try to prolong the life of the corpus as much as possible without taking undue risks.

Bottomline: Do not hate your job too much! If you are not assuming realistic rates of return and inflation, you will not able to retire as early as you think.

Besides if you don’t know how to spend your time in retirement, why bother retiring? Your time would be better spent investing wisely and enriching your skill set.

Dear Brainy Smurfs, Get real!

Do not retire early if your corpus is lesser than that given by the drawdown strategy with reasonable inputs.

What do you think? Do you think it is possible to retire early in India?

What if the expenses were higher than that assumed here?

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106 thoughts on “Is it possible to retire early in India?

  1. Pattabiraman Murari

    ha ha! Bang on! I didn't take taxes into account on purpose. I have used a low almost impractical monthly expense to point out how even that requires a large corpus. At 2.6L pa one can assume income to tax-free in the coming years.If expense is 40K a a month and if one includes tax, one can safely kiss early retirement plans goodbye!

    Reply
  2. Pattabiraman Murari

    ha ha! Bang on! I didn't take taxes into account on purpose. I have used a low almost impractical monthly expense to point out how even that requires a large corpus. At 2.6L pa one can assume income to tax-free in the coming years.If expense is 40K a a month and if one includes tax, one can safely kiss early retirement plans goodbye!

    Reply
      1. AK Anand

        I am firm believer of that Pattu. Once you stop working, you start decaying. Unless, of course, you start playing golf!!

        Reply
      1. AK Anand

        I am firm believer of that Pattu. Once you stop working, you start decaying. Unless, of course, you start playing golf!!

        Reply
  3. Pradeep

    Looks like I will continue working for couple of years more. Sad about it, but thank you Pattu for highlighting the pitfalls.

    Reply
    1. ashalanshu

      Dear Pradeep, do not stop even after 2Y. Keep working. Yes you may change job from high paying but not you love to low paying but you love. Retiring permanently is going to create issues later on when you 'll not have the capacity to handle the BLACK SWAN events.

      Thanks

      Ashal

      Reply
    2. pattu

      Thanks Pradeep. As Ashal say, never quit until you have enough corpus to retire with fixed income instruments. If you want to invest in equity, invest only a small portion of it. Learn about the bucket method etc.

      Reply
      1. Pradeep

        Thanks Ashal and Pattu. The worry is the energy one spends on creating a realistic corpus may eventually leave one incapacitated to handle black swan. Stop working means stop working for corporates and their appraisal system and do what u like as u said not for income.

        Reply
        1. pattu

          Agree with you Pradeep. You will need to strike a balance. If you must retire early do so only if you can walk into a job at any point in your life!

          Reply
  4. Pradeep

    Looks like I will continue working for couple of years more. Sad about it, but thank you Pattu for highlighting the pitfalls.

    Reply
    1. ashalanshu

      Dear Pradeep, do not stop even after 2Y. Keep working. Yes you may change job from high paying but not you love to low paying but you love. Retiring permanently is going to create issues later on when you 'll not have the capacity to handle the BLACK SWAN events.

      Thanks

      Ashal

      Reply
    2. pattu

      Thanks Pradeep. As Ashal say, never quit until you have enough corpus to retire with fixed income instruments. If you want to invest in equity, invest only a small portion of it. Learn about the bucket method etc.

      Reply
      1. Pradeep

        Thanks Ashal and Pattu. The worry is the energy one spends on creating a realistic corpus may eventually leave one incapacitated to handle black swan. Stop working means stop working for corporates and their appraisal system and do what u like as u said not for income.

        Reply
        1. pattu

          Agree with you Pradeep. You will need to strike a balance. If you must retire early do so only if you can walk into a job at any point in your life!

          Reply
  5. Zarir Wadia

    Pattu, Do you know Peter ponzo of canada? Well, he has created a portal named gummy-stuff. Org and has hundreds of links which opens in to spread sheets but all for american/canadian market. You remind me of him wrt the hard work you put in to educate the investors. Do visit his site to have glimpse of what he has done over the years.

    Reply
  6. Zarir Wadia

    Pattu, Do you know Peter ponzo of canada? Well, he has created a portal named gummy-stuff. Org and has hundreds of links which opens in to spread sheets but all for american/canadian market. You remind me of him wrt the hard work you put in to educate the investors. Do visit his site to have glimpse of what he has done over the years.

    Reply
  7. Harshit Shah

    Bajaj Allianz developed Lifelong Assure - a unique plan that provides you income & protection till your 100 birthday so that you can live worry-free for a lifetime.

    Reply
  8. Harshit Shah

    Bajaj Allianz developed Lifelong Assure - a unique plan that provides you income & protection till your 100 birthday so that you can live worry-free for a lifetime.

    Reply
  9. Piyush Khatri

    Hi Pattu, was roaming your homepage for a nice read and stumbled upon it. Its actually a hard question to answer.
    Mostly people who want to retire early, say 45, wish to retire from their "regular job" and want to pursue their hobbies or start looking for the dream job. To pursue a hobby, suppose cooking in your owned restaurant or being a mechanic in your own garage, needs planning too.
    These people would like to have a regular passive income, say 20-25k. If their business is not going well, they will have some amount to keep them going on daily basis.
    I think Two questions they should ask is "what will I do after 45?" "How much I need to Build my Garage?"
    40 years is a long time. You don't want to count money left in your corpus after each passing month. Be prepared if you want to retire early.

    Reply
    1. pattu

      Thanks Piyush. Yes, I agree with you. These are most important considerations for the early retiree. Thank you.

      Reply
  10. Piyush Khatri

    Hi Pattu, was roaming your homepage for a nice read and stumbled upon it. Its actually a hard question to answer.
    Mostly people who want to retire early, say 45, wish to retire from their "regular job" and want to pursue their hobbies or start looking for the dream job. To pursue a hobby, suppose cooking in your owned restaurant or being a mechanic in your own garage, needs planning too.
    These people would like to have a regular passive income, say 20-25k. If their business is not going well, they will have some amount to keep them going on daily basis.
    I think Two questions they should ask is "what will I do after 45?" "How much I need to Build my Garage?"
    40 years is a long time. You don't want to count money left in your corpus after each passing month. Be prepared if you want to retire early.

    Reply
    1. pattu

      Thanks Piyush. Yes, I agree with you. These are most important considerations for the early retiree. Thank you.

      Reply
  11. Deep

    Interesting post .But i believe with kind of monthly expense 20-25k to start with retirement is possible with 50 lk.Here's how keep around 12lk in debt funds and around 38 lk in equity funds to start with.Basically keep around 5 yr cover in debt funds.Since u would be withdrawing monthly or weekly from debt fund the corpus of 12 lk over a period of five yrs would grow too depending on inflation.Now Assuming GDP growth 4-5 % ,very conservative haan,the equity portfolio would give REAL RETURNS in the region of 5-6 % assuming 1-2 % out performance.So ur equity part would give u a real return in the region 12-13 lk ,now this is excluding the inflation part of return,delibrately ommited as the focus of my reply is equity allocation should be sufficient to generate a real return to cover for the real capital consumed from debt.If a 5 % inflation is factored in the 38 lk would grow to 64 lk .Take any benchmark index in the world over long time that is around 10 yr the returns are inflation+GDP+outperformance.For eg for sensex it is around 18 % for last 10 years and for dow around 7.5%.The only catch here is the volatality of equity markets,that can be countered by keeping 5 yr debt cover so that u don't have to sell equity in case of a market correction.Finally as somebody in the thread mentioned retirement does not mean u stop working all together,but it is rather quiting the daily grind to do something where u have your own free will and engage in hobbies which u missed out.Think about it if i have 40-45 years in retirement will i keep everything in fixed income?Why would i ?

    Reply
    1. pattu

      To me this wishful thinking Deep. You are completely ignoring standard deviation in the argument. Please tell me the probability of getting a real return of 1% (forget 5%) from equity, year-on-year? A couple of bad years is enough for you to rejoin the rat race.
      5% inflation in India is simple not practical. Lool at my real inflation numbers post.

      Reply
      1. Deep

        The returns on equity won't be smooth as i already mentioned its volatile,hence the 5 yr debt cover "u don’t have to sell equity in case of a market correction".Regarding inflation irrespective of its level the above calculation holds true.The point is equity will deliver real returns but not in yearly pattern but in a volatile manner down 20 % one year up 30% another year.Check out any benchmark indices return CAGR over a period of time.Sensex has given around cagr 17% in last 10 years,which is i would say 2-3 % outperformance over nominal GDP growth(Real GDP+inflation).Even in the case of a market correction from current levels to say 20% ,it is still 15% cagr for last 10 years.There are basically two major variables in this approach size of your equity asset and gdp growth,which determines whether u can cover for the capital eroded.Finally what i feel is the wrong and the over abused use of the word "RISK".So many of personal finance articles,discussions and various media invariably attach the word RISK with equity.The correct word should be "VOLATILE".

        Reply
        1. pattu

          Please check the associated standard deviation with those 15% and 17% percent figures. The standard deviation is still high enough to make the return a single digit figure. There are 7-8 periods when the sensex has remained flat. Besides that figure you quote is heavily influenced by the Harshad Mehta scandal when the Sensex returned. 272%. Get that out of the equation with tool and check for yourself:
          http://freefincal.com/understanding-the-nature-of-stock-market-returns/

          Reply
          1. Deep

            The harshad mehta scandal happened in early 90s.i have said last 10 year data.Besides market regulation is far better today and size and depth of the market itself makes it impossible to manipulate that is unless u r dealing in penny stocks .Single digit return is possible definitely over 5 yr period,thats the reason for the debt cover,may be a 7 yr cover if u r risk averse.The key is to sell equity to replinish debt cover in a rising market perhaps similar to what a fund like FT Dynamic PE does.But i personally feel that the days of very high volatality is over for index.The reason is the relative size of emerging markets today is not as small as it used to be .

          2. pattu

            I did not say such a scandal will happen again. I said if you remove the scandal out of the equation, long term equity returns are much lower. The 15% cagr figure is heavily influenced by the number.
            Use the std dev with 10Y return and you will know how high the probability of single digit return is.
            I think it is extremely dangerous to assume volatility will decrease. That is the only thing that has remained constant about the market.
            Anyway, let us agree to disagree.

  12. Deep

    Interesting post .But i believe with kind of monthly expense 20-25k to start with retirement is possible with 50 lk.Here's how keep around 12lk in debt funds and around 38 lk in equity funds to start with.Basically keep around 5 yr cover in debt funds.Since u would be withdrawing monthly or weekly from debt fund the corpus of 12 lk over a period of five yrs would grow too depending on inflation.Now Assuming GDP growth 4-5 % ,very conservative haan,the equity portfolio would give REAL RETURNS in the region of 5-6 % assuming 1-2 % out performance.So ur equity part would give u a real return in the region 12-13 lk ,now this is excluding the inflation part of return,delibrately ommited as the focus of my reply is equity allocation should be sufficient to generate a real return to cover for the real capital consumed from debt.If a 5 % inflation is factored in the 38 lk would grow to 64 lk .Take any benchmark index in the world over long time that is around 10 yr the returns are inflation+GDP+outperformance.For eg for sensex it is around 18 % for last 10 years and for dow around 7.5%.The only catch here is the volatality of equity markets,that can be countered by keeping 5 yr debt cover so that u don't have to sell equity in case of a market correction.Finally as somebody in the thread mentioned retirement does not mean u stop working all together,but it is rather quiting the daily grind to do something where u have your own free will and engage in hobbies which u missed out.Think about it if i have 40-45 years in retirement will i keep everything in fixed income?Why would i ?

    Reply
    1. pattu

      To me this wishful thinking Deep. You are completely ignoring standard deviation in the argument. Please tell me the probability of getting a real return of 1% (forget 5%) from equity, year-on-year? A couple of bad years is enough for you to rejoin the rat race.
      5% inflation in India is simple not practical. Lool at my real inflation numbers post.

      Reply
      1. Deep

        The returns on equity won't be smooth as i already mentioned its volatile,hence the 5 yr debt cover "u don’t have to sell equity in case of a market correction".Regarding inflation irrespective of its level the above calculation holds true.The point is equity will deliver real returns but not in yearly pattern but in a volatile manner down 20 % one year up 30% another year.Check out any benchmark indices return CAGR over a period of time.Sensex has given around cagr 17% in last 10 years,which is i would say 2-3 % outperformance over nominal GDP growth(Real GDP+inflation).Even in the case of a market correction from current levels to say 20% ,it is still 15% cagr for last 10 years.There are basically two major variables in this approach size of your equity asset and gdp growth,which determines whether u can cover for the capital eroded.Finally what i feel is the wrong and the over abused use of the word "RISK".So many of personal finance articles,discussions and various media invariably attach the word RISK with equity.The correct word should be "VOLATILE".

        Reply
        1. pattu

          Please check the associated standard deviation with those 15% and 17% percent figures. The standard deviation is still high enough to make the return a single digit figure. There are 7-8 periods when the sensex has remained flat. Besides that figure you quote is heavily influenced by the Harshad Mehta scandal when the Sensex returned. 272%. Get that out of the equation with tool and check for yourself:
          http://freefincal.com/understanding-the-nature-of-stock-market-returns/

          Reply
          1. Deep

            The harshad mehta scandal happened in early 90s.i have said last 10 year data.Besides market regulation is far better today and size and depth of the market itself makes it impossible to manipulate that is unless u r dealing in penny stocks .Single digit return is possible definitely over 5 yr period,thats the reason for the debt cover,may be a 7 yr cover if u r risk averse.The key is to sell equity to replinish debt cover in a rising market perhaps similar to what a fund like FT Dynamic PE does.But i personally feel that the days of very high volatality is over for index.The reason is the relative size of emerging markets today is not as small as it used to be .

          2. pattu

            I did not say such a scandal will happen again. I said if you remove the scandal out of the equation, long term equity returns are much lower. The 15% cagr figure is heavily influenced by the number.
            Use the std dev with 10Y return and you will know how high the probability of single digit return is.
            I think it is extremely dangerous to assume volatility will decrease. That is the only thing that has remained constant about the market.
            Anyway, let us agree to disagree.

  13. gautham

    pattu, on the same lines, the market has corrected heavily in march 2009. the logic of removing 270% gain is flawed. because the at the end of the day its already taken into consideration in the current P/E of the market.
    (btw one should stop analysing index returns or index p/e. you got to be stock specific. over a long period there is a clear correlation between price growth and eps growth. ( of course there two exceptions. 1 when you overpay and it undergoes a p/e compression and 2. market rewards consistent performers ( and has good earning visibility) with a p/e re rating)

    Reply
    1. pattu

      From the point of view of a market analyst, I will agree with you. The 270% is part and parcel of history. However, I am planning for retirement. I would prefer to take into account black swan events like 2009 and ignore white swan events like the 270% because I would rather prepare for the worst case scenario. The 15% cagr is too heavily influenced by the 270% for my liking and I would prefer to assume nothing like happens in the future.

      Reply
      1. Deep

        Even if i take 10% cagr with 5% inflation 45 lk is sufficient for retirement at todays price if my current annual expenditure is 4 lk.Here's how 15 lk in debt 30 lk in equity for a five year period.Will withdraw from debt part weekly for my expenditures,now for the subsequent 5 yr period will target 30% higher allocation in both i.e debt 20 lk and equity 40 lk approx .Now say the equity market performs well and crosses 40 lk in my first 5 yr then i would transfer the excess amount into debt.As per data in hdfc mf site the worst 5 yr rolling return of sensex is 3.3% cagr.Well that means in the worst case my equity portion will be around 35 lk,still enough to replinish my debt portion for a year without drawing from the reserve capital initially started.There will be only two cases where i make transfer from equity to debt 1)When equity portion crosses next 5 yrs target .
        2)When debt part is exhausted.

        Reply
        1. pattu

          Sound good on paper. But there are too many ifs: 5% inflation, 10% cagr (std dev?), 4lk annual expenditure.

          Reply
  14. gautham

    pattu, on the same lines, the market has corrected heavily in march 2009. the logic of removing 270% gain is flawed. because the at the end of the day its already taken into consideration in the current P/E of the market.
    (btw one should stop analysing index returns or index p/e. you got to be stock specific. over a long period there is a clear correlation between price growth and eps growth. ( of course there two exceptions. 1 when you overpay and it undergoes a p/e compression and 2. market rewards consistent performers ( and has good earning visibility) with a p/e re rating)

    Reply
    1. pattu

      From the point of view of a market analyst, I will agree with you. The 270% is part and parcel of history. However, I am planning for retirement. I would prefer to take into account black swan events like 2009 and ignore white swan events like the 270% because I would rather prepare for the worst case scenario. The 15% cagr is too heavily influenced by the 270% for my liking and I would prefer to assume nothing like happens in the future.

      Reply
      1. Deep

        Even if i take 10% cagr with 5% inflation 45 lk is sufficient for retirement at todays price if my current annual expenditure is 4 lk.Here's how 15 lk in debt 30 lk in equity for a five year period.Will withdraw from debt part weekly for my expenditures,now for the subsequent 5 yr period will target 30% higher allocation in both i.e debt 20 lk and equity 40 lk approx .Now say the equity market performs well and crosses 40 lk in my first 5 yr then i would transfer the excess amount into debt.As per data in hdfc mf site the worst 5 yr rolling return of sensex is 3.3% cagr.Well that means in the worst case my equity portion will be around 35 lk,still enough to replinish my debt portion for a year without drawing from the reserve capital initially started.There will be only two cases where i make transfer from equity to debt 1)When equity portion crosses next 5 yrs target .
        2)When debt part is exhausted.

        Reply
        1. pattu

          Sound good on paper. But there are too many ifs: 5% inflation, 10% cagr (std dev?), 4lk annual expenditure.

          Reply
  15. harkol

    There is a scenario where you can retire early (i.e. before 50).

    You'll need a corpus that will provide you the cushion for unforeseen expenses, and against inflation.

    So, in above scenario, If you take inflation at around 8% as worst case average then to be able to live comfortably you need enough corpus which will earn you Rs. 20,000/- and also provide you cushion against inflation and shocks.

    So, if you had a corpus that is double of 1.17cr (say 2.4cr), then by drawing down Rs.20K at real interest rate of zero, it is possible to live for a very long time.

    It is all the matter of the corpus. However, Given sufficiently long time any amount of corpus is not enough!!

    Reply
  16. harkol

    There is a scenario where you can retire early (i.e. before 50).

    You'll need a corpus that will provide you the cushion for unforeseen expenses, and against inflation.

    So, in above scenario, If you take inflation at around 8% as worst case average then to be able to live comfortably you need enough corpus which will earn you Rs. 20,000/- and also provide you cushion against inflation and shocks.

    So, if you had a corpus that is double of 1.17cr (say 2.4cr), then by drawing down Rs.20K at real interest rate of zero, it is possible to live for a very long time.

    It is all the matter of the corpus. However, Given sufficiently long time any amount of corpus is not enough!!

    Reply
  17. Pattabiraman Murari

    Please read the book written by the author of that blog and find out the corpus needed for retirement. I did not say it is not possible. I said it is not possible with dreams of beating the market year after year.

    Reply
  18. Pattabiraman Murari

    Please read the book written by the author of that blog and find out the corpus needed for retirement. I did not say it is not possible. I said it is not possible with dreams of beating the market year after year.

    Reply
  19. Pattabiraman Murari

    Please read the book written by the author of that blog and find out the corpus needed for retirement. I did not say it is not possible. I said it is not possible with dreams of beating the market year after year.

    Reply
  20. Anonymous

    Mr. Pattabiraman, Good article that has attempted rigor but ignores the voluminous research data in retirement research. It doesn't matter which country has done the research, the only difference, as you also say, between US and India are inflation rates. It is possible to retire early using a methodology close to your Scenario 2. Since your article might needlessly scare away many potential early retirees, let me make a few points.
    1. Equities provide long-term inflation adjusted returns. A good retirement portfolio can be constructed with both well-diversified equities and bonds (proportion depending on volatility tolerance and income needs). Emergency funds (of say, 1 year or cash living expenses) can be put in Liquid funds.
    2. Once such a portfolio is constructed, there are various methods of stress-testing it. Note that increasing inflation is not an isolated phenomenon. Real assets generate products that people want to buy will increase in value if inflation rises. By real assets, I don't mean just real estate or gold that Indians have a fascination for, but income producing stable and good-governance corporations. This growth can result in increasing dividends or increasing equity value (corresponding to earnings increases), either way, it can be monetized by the early retiree as per inflation needs.
    3. Another fallacy of the retirement income calculators is that people assume expenses will march steadily in the same rate as inflation. There are lot of research studies that show that people's income needs are fungible and decline with age, beyond 65. While health care costs will rise, there are offsetting factors like less vacations, less fancy eat-outs or none, clothes and other discretionary expenses that old people don't spend money on. So, can you model this reality where after a given age bracket, say when a retiree reaches 65, expenses can be stepped down by say 25%, and then this increases annually by inflation. While this is again a model, that is still closer to reality than increasing income needs marching up say, 7% like a robot year after year - that's not how most people live. Another variant of this is a Bernanke 95% plan, where once you start with a withdrawal rate, the next year you withdraw either 95% of last year's withdrawal or inflation-adjusted current year withdrawal. The latter is what you normally withdraw, but the former is based on the balance of your portfolio (in down years). Again, the element of flexibility is brought in. Reducing withdrawal when equity market is down in a year is a smart way to prolong the portfolio as you sell less assets when the values are lower. This is realistic. That's why smart financial planners call for 2 categories, Core and Discretionary, the latter being fungible.
    4. The fear of the unknown is always there in any kind of planning, and it's no different here than in any other part of life. Even Monte Carlo simulation (after say 1000 scenarios played out using different assumptions on return, inflation and withdrawals) may say the retirement plan is 80% likely to succeed, we should accept it and move on. At the end, it's a simulation and not real life, and it cannot comprehend the myriad ways humans evolve to match their expenses with their income ability. It's the same reason why some one can be happy with Rs. 20000 a month, and others complain about Rs. 2 lacs per month not able to match all their lifestyle needs. There is a vast difference here and this flexibility cannot ever be modeled. I always say to friends that once your scenario planning probability exceeds 80% success rate, be happy and joyfully retire! It's important to plan to some extent but foolish to seek 100% certainty in financial planning when no aspect of life comes even close to 100%! Life is too short to worry about simulation-driven probabilities beyond that point (80% level).

    Reply
    1. pattu

      If you think I have written this post to scare people from retiring early, you are way off the mark. I have no intentions to respond to anonymous comments. Will say this most people who desire financial freedom are clueless about the vicissitudes of life. To them I say, good luck and happy trails.

      Reply
  21. Pattabiraman Murari

    If you think I have written this post to scare people from retiring early, you are way off the mark. I have no intentions to respond to anonymous comments. Will say this, most people who desire financial freedom are clueless about the vicissitudes of life. To them I say, good luck and happy trails.

    Reply
  22. Seeker

    Dear Prof. Pattabi,

    Of all the points mentioned in the previous comment by the Anonymous poster, you chose to focus on the most trivial one. This does not take away the merit of the comment, nor is its validity diminished by the poster being anonymous, which many do these days due to privacy concerns. The poster wasn't spamming or spewing garbage as one could tell reading the comment. On the contrary, it appears the commenter added some value to the whole discussion, perhaps even a valid counter-point. Frankly, I hadn't thought about expenses going down in later years of life, but it makes sense as I look at elder members of my own family when they crossed the age of 60 with independent grown children living away from them. Maybe it is not universal but the concept holds some merit. I need to read up on the Bernanke 95% plan, sounds intriguing. I think the whole 'early retirement' is highly complex, and cannot be reduced to Excel sheets. As the commenter said, some planning is necessary but we cannot stake too much on the accuracy of the plan. Perhaps you will cover all this in a future article. Best wishes, Seeker

    Reply
    1. pattu

      I did not focus on any of the points in that comment. Retirement planning should neither be based on Excel or research reports. My only message from this post is, have enough before retiring (early or otherwise). If you want to believe stress test at 80% levels and think your expenses will go down for your because of your experience, then I can only wish you good luck. I will never assume such things. I also do not want to argue with you or anyone else.

      Reply
  23. harry

    Though inflation is reality today it will not be so many years down the line. India will got through an economic cycle and may be we see deflation 30-40 years from now. I mean it won't be that 1 beer today costs 100/- and 20 years later it will be 1000 per bottle. Somewer it will stop or slow down. Sorry but this blog is more pessimistic than needed

    Reply
    1. pattu

      Data from 1960 for a family shows the inflation is close to 8%. If you think this will be any different in a country which imports oil, is dependent on monsoons, I will not argue with you. Ain't my money.

      Reply
  24. Sid

    As a layman and in my 46th year with two children,wife and own house, please advise what should be the ideal corpus assuming I retire in the next 2 to 3 years.

    Reply
  25. Suman

    What I understand from some other forums on the same subject that a corpus of around 25 - 30 times of your yearly expenses (all inclusive) is something that you need today to retire. Again the understanding is that you will have a spread across equity and debt and not just put your entire corpus in buying an annuity. Do you believe in this?

    I am also not very much in tune with your returns from equity market. Equity based MF's have given better returns over the years. I have gathered data for few large caps in the last 10 years which has seen corrections to the tune of 50% and 25% in close successions. Even then returns have been double digits. So if someone wants his/her portfolio to grow @ 10% with a 60% Debt and 40% equity the rate of returns should be around 7% from debt and 14.5% from equity. 14.5% from equity seems to be tall order year on year for the next 45 years but an active management of MF's and direct equity may do the trick or you manage to generate the delta shortfall through a part time job that you like. And just to mention these nos are post tax (assuming LT gains for equity and indexed data for debt).

    Reply
    1. pattu

      Returns use here are only for illustration. I dont expect anything more than 10% from equity and yes, I believe in siginificant equity exposure after retirement. The mulitple of 25-30 is a comfortable one.

      Reply
  26. pjayadeep

    Firstly, thank you very much for sharing your tools! Really helpful - especially the retirement tools. I discovered this blog a few weeks back and loads of useful information.

    With respect to early retirement, saving a big chunk of your earnings to create a corpus as quick as possible, is a fundamental premise. In fact, Jacob of Extreme Early Retirement has a chart that tells you when you can retire based on your savings rate It also requires a bit of ingenuity in going against the tide to keep yourself afloat in an unorthodox fashion. Most of the American early retirees essentially don't follow the typical american consumerist which is a significant gain. Unfortunately, we are catching this bug and that would require significant years of working as well. I also think where you live post early retirement matters a lot, I have a friend who retired at 40s because he shifted to an area where total expenses are lower than where he was earning. That cuts away a lot of unnecessary fat in terms of your consumerist spending. Essentially you need to have some strategies in place to reduce the expenses, otherwise it is indeed a risky affair.

    Reply
  27. bhushan

    It would be interesting to see if there is a positive correlation betweeen Inflation and Stock returns. My understanding is inflation occurs when supply of goods is limited and money goes towards that. This means in a high inflation scenario many companies that are a part of Stock market would do well as their goods are in demand. Also if there is a recession it means people will be hesitant to buy goods So these will reduce earnings for companies and will reduce the stock prices and hence returns. So lower inflation would imply lower stock returns.

    In any case the real rate of return would have to be positive. So i think tackling inflation is not the main issue here. It is more of a mindset and culture issue as well as infra issue.

    Mindset and culture issue -- Are we ready to stay in rental home even though the house prices and rental yields are screaming that renting is better than owning. Also no home buying means no home loan. Are we ready to live within our means. No fancy cars, no fancy Tvs. No changing mobiles evry one year(that too expensive i phones etc cost around Rs 45000)

    Infra issue - Pathetic public trasnport so need to use cars or 2 wheelers. If this is available in some areas and still people dont use then it is mindset and culture issue.

    Infra issue can also include pathetic banking and MF and insurance culture where it is so difficult to invest and invest sensibly but very easy to take loans and take shitty Insurance products (Try saying term loan to any insurance agent 🙁

    Reply
  28. FInIndia

    Also, you miss the point of the 'financial independence;early retirement (FI;RE)' philosophy.

    It means having a short but intense career solely focused on making money. Then, once you are FI, you have the CHOICE to move to a low stress, more personally fulfilling or intellectually challenging work.

    Look around you, or at your own blog- WordPress, this theme, Apache servers, etc. -are all open source, developed by contributors who were doing this work in addition to their regular jobs.

    Also, Jacob at ERE still earns salary from his job as investor. How many can say that they make more than their annual expenses for their hobby? MMM teaches his son and does construction and contraction work. But the point is they don't HAVE to do it.

    At the end of the day it is a value judgement:

    Are you so attached to your job/do you derive your sense of self-worth from your job that you have poverty in imagination for what would you do with your time without one?

    Do you value family/car/vacation(s) abroad/"status" over your liberty/emancipation/time?

    Reply
  29. Swaraj Retirement

    There are many important aspects of retirement planning which sadly all companies are missing

    1) three step accurate retirement calculator for finding out exact amount of corpus, inflation adjusted tax efficient withdrawal amount pm, & investment needed pm or per year or lump sum to achieve that withdrawals is first & foremost requirement.90% of calculator fails in giving right figures

    2)proper asset allocation model is needed with proper research of schemes ideal for retirement savings parking has to be identified,no purchasing of ulips or otc kind high sounding mf schemes from desk of mutual fund advisor or bank HNI service desk is right way of investing for retirement .

    3) portfolio rebalancing is most critical in pre retirement phase which mitigates risk as the retirement age approaches.d) last but not least all withdrawals has to be inflation adjusted along with tax efficient,if retirement planning is missing these vital points, avoid them.visit http://www.retirementontrack.com

    Reply
  30. Nanmith

    Hi Can i get your email ID to share my retirement plan excel sheet with you ? you may please share your feedback on it

    Reply
  31. Saurabh Tandon

    Very well written, but i don't think early retirement is for me, but for the people who can actually manage it...Good luck. At the moment the best i can do is investments so that my future is secure. Recently i have taken tata aia life's Smart growth plus plan which offers flexibility in choosing policy term, has good policy returns and tax benefits u/s 80C & 10(10D).

    Reply
  32. Sanjeev

    Hi,

    Good article, but not sure if I fully agree with your views.
    I have been recording all of my expenses for last 10 years monthwise. I have seen many challenges ( very costly medical expenses - 2 occasions, job loss, house update /renovation costs, .....). I think 8% inflation is too conservative.
    Out of 10, last 6 years recordings have been my living expenses in Mumbai. Surprisingly, actual expense increase I have witnessed is little below 6%. That said, there have been some adjustment in lifestyle ( going 2-3 times per week to malls to once a week trip ). If you have proven ability to manage expenses and make lifestyle adjustments as necessary, your chances are better with early retirements.

    Also, Rs20,000 per month is not practical I feel for middle class family, actual will be upwards of 40K. Its best to set aside some money for events that you foresee ( kids educations, their wedding expenses,......)

    I have my own financial model that checks where you stand financially. I believe there are different levels of "early retirements".
    Check this tool and let me know what you think:

    http://homes.goancove.com/fsi

    Reply
    1. freefincal

      That is how I will plan: 8% inflation. Please recognise that lifestyle changes will impact the plan. These could be initiated by your or forced upon for life. I wont take chances like that.
      20K is an illustration. My sheets allow you to change that. Saw your tool. I am afraid it makes little sense. You ask for retirement age, life expectancy, ask for assets and assume I will draw on the assets from today! Why would I do that? There are much simpler ways to evaluate financial independence.

      Reply
      1. Sanjeev

        Thanks for your feedback on my tool.

        The tool will draw money from your assets today ONLY IF your expenses are higher than your earnings today ( this year).

        Example: If you earn annually 40Lakhs this year but spent 60Lakhs, where will additional 20 Lakhs come from ? ( your assets/savings ) !

        There is lot of finetuning needed for the tool. However it should give you sufficient idea where you stand financially now ( and in years to come !)

        Regarding your planning for 8% inflation, tool allows you to enter your own values ( You could raise it to 10% if you want to check that scenario ).

        However, I feel actual inflation for an individual might be lower. I have actually seen from my spending patterns.
        Secondly, your spendings after the retirement will be lower than what the level now.
        But it is a good, "safer" idea to assume it will remain constant level.

        Reply
        1. freefincal

          I am not sure it gives me an idea of where I stand, but if it helps you ...
          You spending patterns are YOURS. Extrapolation is a bad idea. This assumption, "our spendings after the retirement will be lower than what the level now" is even worse. One illness will change all that.

          Reply
  33. Satish

    something wrong... you mentioned..
    For example, for a withdrawal rate of 5%, Brainy would need only 52 Lakhs to start with, but require an annual return of 13.7%

    For a withdrawal rate of 1%, Brainy would need only 260 Lakhs to start with, and required an annual return of 13.7%.

    both the statements can't be right. for withdrawal rate of 5% or 1% , return required can't be same 13.7%. can u pls check?

    Reply
    1. freefincal

      This is again the drawback of using withdrawal rates. There is nothing mathematically wrong with it, but is still wrong! Simply because it does not convey my point:

      "Lower the withdrawal rate, higher the initial corpus required lower the return."

      Initial withdrawal rate = 5%, corresponds to 8.8% inflation and return of 13.7%
      Initial withdrawal rate = 1%, 8.8% inflation and return of 5.3%.
      This is the correct statement.

      Amusingly,
      Initial withdrawal rate = 1%, 17.44% inflation and return of 13.7%. also gives the same corpus. This is the mistake!
      Corrected the post. Thank you.

      Reply
      1. Satish

        thanks, so if initial withdrawal rate is 2% and inflation is 7.2% , what returns would be required ? about 7% right?. or have I got it wrong again. I am working on an iPad and thus not able to use the excel. we should try to develop a formula where if u put in IWR, and inflation it can give u return% required.

        Reply
  34. Satish

    saw an amazing site. this site gives all these work sheets in simple fill up input. it even works on an iPad. nothing to download. the formula derivations are amazing.
    http://www.financialwisdomforum.org/gummy-stuff/retirement-calculators.htm

    I think Pattuji mentioned gummy-stuff.org . this is a copy of this and has been developed over 16 years. amazing. for eg

    (i/y)m = 1 - (f/iF){(y/x)n-1}(y-i)/{(y/x)-1}

    taking log of both sides

    m= log (all the top formula)/ log(1/y)

    Reply
  35. Satish

    the formula for calculating how long your savings will last in an inflating environment is as follows...
    N = -log(1 - (B/P)(z - 1)) / log(z)

    where B is amount at start, P is withdrawal each year or period, z is incremental rate of return which is

    z= (1+R)/(1+I) R is rate of return on capital, I is inflation rate.

    amazing yes?

    so next step, for inflation of 7.14%(price double every year), 6.5% safe rate of return, if u spend 1% of your savings every year ur savings will last 78 years. if u spend 2% they will last 43 years and at 3% they will last 30 years.

    so now knowing how much money u have u can calculate how much u should spend to last a certain number of years.

    what do u think Pattuji?

    Reply
  36. Satish

    So this is amazing. I put this formula in an excel. this tells me immediately how many years can i survive on withdrawing a certain percentage of my savings every year, if the difference in the Inflation rate and the rate of return is a certain value. for eg if i withdraw 2% of my savings every year and the difference in inflation rate and savings rate is say 1% , which means i earn 7% on my savings but inflation is 8%, then my savings will last 41 years. Here is the result. i dont think i can attach the excel

    R-I -4% -3.5% -3.0% -2.5% -2.0% -1.5% -1.0%
    Returns 3.00% 3.50% 4.00% 4.50% 5.00% 5.50% Inflation 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% Withdrawal
    0.25% 73 80 88 99 113 134 166
    0.50% 56 61 66 73 82 95 112
    0.75% 47 50 55 60 66 75 86
    1.00% 41 44 47 51 56 62 70
    1.25% 36 39 41 45 48 53 59
    1.50% 33 35 37 40 43 47 52
    1.75% 30 32 34 36 39 42 46
    2.00% 28 29 31 33 35 38 41
    2.25% 26 27 28 30 32 34 37
    2.50% 24 25 26 28 30 32 34
    2.75% 23 24 25 26 27 29 31
    3.00% 21 22 23 24 26 27 29
    3.25% 20 21 22 23 24 25 27
    3.50% 19 20 21 22 23 24 25

    What do you think PattuJi? Looks good ?

    Here is the formula , all made by your's truly with some checks to remove log(-1) values

    =IF((OR((G$11=G$12),((1-(1/$A14)*(((1+G$11)/(1+G$12))-1))<0))),":(", -LOG(1-(1/$A14)*(((1+G$11)/(1+G$12))-1)) / LOG((1+G$11)/(1+G$12)))

    Reply
    1. freefincal

      I understand that you are excited about this. Unfortunately, I simply do not have the time to check this and offer an opinion or observation. Perhaps other readers will find it useful. As mentioned to you earlier, this math is pretty well known. Happy exploring. This is something related to this written a while back: What Should Be Your Retirement Withdrawal Rate?

      Reply
  37. Satish

    Yes. I must say i have just started exploring and i see you have travelled this road a long time back. for me this is a real life decision to be made. so this is important. All this quest for a "General Theory OF Retirement" started with reading your blogs and the amazing excel's you have come up with.
    Basically if you were in my place, say 50 years of age and contemplating retirement, with a current monthly expense of 30000/pm, what would you think my retirement corpus should be and assuming i have no (known) diseases how long should i plan for ?

    Can you give me a figure. i keep coming up with 2-3 cr.
    What do you think ? Even if it is gut feel. i think you have reached a place beyond simple maths...like Sachin Tendulkar, he does not need a book to tell him how to hit cover drives...
    so in your expert opinion what do you think..give me a number.

    I will ofcourse due my own due dilegence and will not blame you if i run out of money and not years 🙂 🙂
    Regards
    Satish

    Reply
    1. freefincal

      It is a real life decision for everyone! I don't want to guess. Please use one my sheets with 8% inflation and if 7% return to be safe.

      Reply

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