A reader says, “I’ve read articles on your freefincal website about early retirement, corpus needed, and asset allocation needed. I wish to request you to have a similar study for the case below”.
“My wife and I work in the IT industry. Our age is 30 years. Combined, we earn 4L per month. We expect this to increase by 10% per year. We have one son, aged two years. Our yearly expense is 5L. This includes occasional trips, too. We own a house and car. We don’t have any debt. My parents are not financially dependent on me. Our motive is to retire early. We don’t have any other goals—just our son’s education. CBSE schools around us have fees ranging from 1-1.5L per year”.
“Post-retirement, I wish to pursue other endeavours. I will earn 1L per month from those endeavours. But this would be variable pay. 1L is an average figure.
Our first query is – how many years will we have sufficient corpus to retire? We will still have 1L per month of earnings from other endeavours”.
“We have company-provided health insurance. We don’t have any other health insurance, life insurance or term insurance”.
“Our current corpus is divided as follows:
90L in Nifty 50 Index Funds.
50L in fixed-interest funds (Liquid funds, money market funds).
I request you consider my query – How many years will we have sufficient corpus for early retirement? Also, what should be asset allocation after we retire?”
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First, immediately get life insurance and health insurance for the family. Refer to: How to choose a health insurance policy (with a shortlist). Then, you must include this expense (at least the health insurance premium) in the retirement expenses and redo the retirement planning exercise.
We shall use the freefincal robo advisor tool to answer your questions. Note: This is only a quick check to find out if you are in the right direction. Please do a rigorous retirement planning calculation and double check all your inputs and assumptions.
It looks like you have a pretty high savings rate and that is one of the key requirements of early financial independence. Assuming a 10% post-tax return expectation from equity and 6.5% post-tax return from your debt funds, in about 15Y, your current investment should grow to about Rs. 5 Crores. This is enough to retirement by age 45. So you have in a sense you have already achieved your target corpus. I have not yet included your post-retirement income.
If I reduce the retirement age to 40 and include the post-rertirement income (three such sources can be included in the robo tool), for about 30 years in retirement, you only need to invest about Rs. 15K in a 60% equity, 40% fixed income portfolio (this asset allocation will vary over the yers as the equity exposure reduces – the robo tool suggests how).
Now let us answer your specific questions
- In how many years will we have sufficient corpus to retire? At the high savings rate you current enjoy, you should ready in a few years ~ 35 or less! But be sure to check your numbers and do a rigorous calculation. Your lifestyle and expenses are key here.
- what should be asset allocation after we retire? About 35% equity to ensure you don’t need to work again.
Suggestion: Unless there is some compelling reason to quit your jobs, do not. Even if you do, actively purse part-time/flexible sources of gainful employment. You need to buy life and health insurance immediately. Health insurance costs need to be included to your annual expenses. I wish you all the best.