Last Updated on February 15, 2024 at 6:00 am
We recently received two questions which would be interesting to discuss together: (1) How much do I need to retire at 40 in India? (2) What should be the portfolio size in terms of x(annual expenses) so that we could maintain 60:40 post FIRE/retirement (at early ages like 35-40)? How big must one have so that the sequence of returns can be handled?”
There is a growing resentment against early retirement enthusiasts. Many argue that it is folly to retire so early unless there is a concrete plan for a passionate alternate income. I could not agree more. Nonetheless, retirement at 40 is a possible dream; we cannot dismiss everyone seeking it.
Let us use the freefincal robo advisory tool to do an early retirement planning illustration.
Inputs
Join 32,000+ readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! (Link takes you to our email sign-up form)
🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥
- Current monthly expenses that will persist in retirement: Rs. 60,000
- Age at the end of the current year: 28. Age of spouse: 28
- Age you wish to retire 40
- Years to retirement 12
- Percentage by which your monthly investments can increase each year: 10%
Assumptions
- Post-tax return expected from equity investments: 10%
- Post-tax return expected from current taxable fixed income 6%
- Rate of return expected from current tax-free fixed income 7%
- Inflation before retirement: 7%
- Assumed life expectancy of younger spouse: 90
- Inflation during retirement: 6%
- Years in retirement (until younger spouse reaches age 90) 50
- Do you want to use the income flooring option? No. Learn more about income flooring and annuity laddering, optional features in the robo-advisory tool.
Outputs
- Monthly expenses in the first year of retirement: Rs. 1,35,131
- NET corpus required at retirement (assuming money will be invested in different buckets. This is after accounting for the future value of current investments, post-retirement benefits, and any post-retirement income) Rs. 5,65,81,718 (5.65 Crores).
Note: In this simple illustration, we have not included any current investments, retirement benefits or post-retirement income. These can be easily added to the tool.
- The initial monthly investment required, including EPF/NPS contributions: Rs. 1,37,522
Asset Allocation Schedule
| Age | Suggested Equity allocation before retirement |
| 29 | 60% |
| 30 | 60% |
| 31 | 60% |
| 32 | 60% |
| 33 | 60% |
| 34 | 57% |
| 35 | 53% |
| 36 | 50% |
| 37 | 47% |
| 38 | 42% |
| 39 | 38% |
| 40 | 33% |
Post-retirement Plan
Overall asset allocation: 31% equity and the rest in fixed income. Most readers would be surprised at this low equity allocation, even for early retirement. Our research shows that this is the best way to handle the sequence of returns risk in retirement. See Lectures on Goal-Based Portfolio Management.
- Emergency Bucket: 5% of the corpus
- During the first 15 years, investments are made in three buckets: low-risk, medium-risk, and high-risk.
- The buckets will be actively managed to reduce risk: 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 13 years. After that, the other buckets will also be progressively used.
- Alternatively, one can manage the buckets so that at all times, 15 years of expenses are always available in the income bucket.
Details:
- Income Bucket with 100% fixed income for a guaranteed inflation-indexed return for the first 15 years of retirement: 47% of the corpus
- Low-risk bucket: 26%% of the corpus. About 50% of this is in equity. This will provide income from the 16th to the 28th year of retirement.
- Medium risk Bucket: 14% of the corpus. About 70% of this is in equity. This will provide income from the 29th to the 38th year of retirement.
- High-risk Bucket: 9% of the corpus, entirely in equity. This will provide income from the 39th to the 50th year of retirement.
Naturally, this is only one of many ways to handle retirement buckets. The tool has a DIY bucket calculator to modify the plan per individual requirements.
Now, let us consider the two questions.
How much do I need to retire at 40 in India?
About 79X of current expenses if the person is 28 years of age. If we inflate current expenses at the rate of 7%, then this is 35 times the expenses at age 40. These are should not used as thumb rules. A proper calculation with individual inputs should be done.
(2) What should be the portfolio size in terms of x(annual expenses) so that we could maintain 60:40 post FIRE/retirement (at early ages like 35-40)? How big must one have so that the sequence of returns can be handled?”
The answer to this is subjective. Some would say, one can take the 5.6 crores computed and invest 60% in equity. That would be tomfoolery in my opinion. If the aim is to ensure sequence of returns risk is mitigated then, we recommend ensuring inflation indexed income is guaranteed with fixed income investment for at least half the estimated retirement tenure (in this case, 25 years)
A good Rs. 4.6 crores is necessary for this. So that would mean a total retirement corpus of 11.5 crores. So that is almost 160X of current annual expenses or 71 times the annual expenses at the time of retirement (assuming current age is 28).
Please note this is only an opinion that errs on the side of caution. You are welcome to disagree with me but if it were me, I would not contemplate early retirement at 40, unless I had a corpus close to the above multiples.
Some people argue, that the corpus can be lower since they would have a side income. This is again tomfoolery. An early retirment plan should assume that there is no income from gainful employment.
🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 7000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! ⇐ More than 2,500 investors and advisors use this!
Track your mutual funds and stock investments with this Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds and ETF screeners and momentum, low-volatility stock screeners.
- Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
- Have a question? Subscribe to our newsletter using the form below.
- Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.
Join 32,000+ readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! (Link takes you to our email sign-up form)
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.Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition is!! Watch the first lecture for free! One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course! Increase your income by getting people to pay for your skills! ⇐ More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!
Our new book for kids: “Chinchu Gets a Superpower!” is now available!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Do you want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & its content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
- Twitter @freefincal
- Subscribe to our YouTube Videos
- Posts feed via Feedburner.
Our publications
You Can Be Rich Too with Goal-Based Investing
Published by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want
This book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.Your Ultimate Guide to Travel
This is an in-depth dive into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)