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
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- 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.