Examples: How much do I need to retire early?

Published: October 29, 2016 at 12:02 pm

Last Updated on

Happy Diwali/Deepavali! More and more people are thinking about financial freedom and early retirement. Here are a few simple illustrations to answer the titular question: How much do I need to retire early?

The first step is to recognise the difference between financial freedom financial independence.

Financial independence = Retirement (early or normal). There is no need for you to work again. You work to keep busy and healthy and active. Not for money.

Financial freedom = temporary break from corporate shackles. You do not have enough to never work again, but have enough to not work for say 5-6 years or more. In this time, you can work towards your passion with peace of mind and create an income from it (which is necessary).

Whether you are aiming for early retirement or financial freedom, the following illustrations are relevant because it seeks to answer,

How long will a corpus last? This is equivalent to asking,

How much do I need to retire early?

Do check out the free E-book: How to retire early in India to plan your strategies.

How much I need, how long will it last, what return do I require and how much can I draw are important questions that can be answered with tools found here: four simple retirement planning tools

Illustration 1

Suppose you have a corpus, C = Rs. 75 Lakh (75,000,00), you are going to assume that the post-tax return from the entire portfolio is equal to the rate at which your expenses increase (inflation). That is the real return on investment is zero.

The annual expenses in the first year of retirement = Rs. 3 Lakh (or C/25)  (After that expenses will increase at the rate of inflation).

Then the money will last for 25 years. This means, that you invest 75 Lakh in a basket of instruments offering net post tax return of say, 8%. At the start of each year, you withdraw money for expenses and this withdrawal is also at the rate of 8% (real return =0), after 25 years, the money will get exhausted. For detailed illustrations see, Is it possible to retire early in India?

So the thumb rule is: For zero real return, the corpus will last for a time given by Corpus divided by withdrawal in the first year.

In the above example, 75L/3L = 25 so the corpus will last for 25 years.

If the initial withdrawal was 7.5L then 75L/7.5L = 10years (for zero real return).

Illustration 2

Thumb rules cannot always be used, and I prefer to use calculators. Faster and more accurate. Here is how the number of years a corpus will last varies with  real return.


Achieving a real return (post-tax return above inflation) is very easy … on Excel! In real life, it is better to err on the side of caution and use zero real return or even -1% real return. Thumb rules cannot be used for the kind of behaviour shown above. Please use this calculator.

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Illustration 3

To further illustrate how erroneous thumb rules can be, have a look at the three lines below.
The vertical axis = no of years the corpus will last

The horizontal axis = Corpus divided by initial annual expense. For example, if the corpus is 50L and 4L is the initial annual expense, then 50/4 =12.5 would be value in the x-axis.


The thumb rule mentioned above is exact for the 0% real return line. This is a straight line (X=Y).

For +1% or -1% real return, notice how marked the departure from the thumb rule is!

This is the screenshot of the above-mentioned calculator. It would take less than a minute to calculate.


How to calculate the time a corpus will last?

Calculating this is simple in Excel. I usually prefer a formula to a function but functions are easier to implement.

How long will a corpus last =NPER((1+return)/(1+inflation)-1,-payment,corpus,,1)

Here NPER is the excel function,

corpus is the available sum to draw an income from, while rest grows in a basket of instruments.

return is post-tax return expected on the entire retirement corpus

payment is the monthly expenses in the first year of retirement

inflation is the rate at which the monthly payments increase each year in retirement.

(1+return)/(1+inflation)-1 = real return, representing the ability of a return (post-tax)  to combat inflation.

Free E-book

Do check out the free E-book: How to retire early in India.

You can also consider ordering our new book: You can be rich too with goal-based investing.

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About the Author Pattabiraman editor freefincalM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored two print-books, You can be rich too with goal-based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management. He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice. He conducts free money management sessions for corporates and associations on the basis of money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association. For speaking engagements write to pattu [at] freefincal [dot] com
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