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All of us have dreams and goals. Unfortunately for most of us the total monthly investment required to achieve these goals is a little too much. The reasons for there are many: we don't earn enough, we spend a lot, we have a lot of outstanding debt etc. etc.

Read this article by Sanjay Dixit who works is a financial planner at Horus Financials

How a Financial Planner can add value through savings optimization?

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When you make a financial plan/calculation you usually assume some inflation rate and interest rate. However, there is no guarantee that these rates will be the same as the ones you assumed. If actual inflation was lower and actual interest rates higher, great! Well you know that is a pretty rare scenario. What is likely to happen is inflation could be higher and interest rates lower, maybe because of the economy, markets falling etc. etc.

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Can you become financial independent and retire in 5 years? I came across the Early Retirement Extreme blog sometime back. Dr. Jacob Lund Fisker is a theoretical physicist who became financially independent in 5 years by saving upwards of 75% of his take-home pay. He has also written a book about how he did it.

According to Dr. Fisker:

  • To achieve early retirement : you need to save more than 75% of your take-home pay each month for about 5 years!
  • For a goal that is only 5 years away the power of compounding is not that important! There will not be a significant difference between the amount invested and the compounded amount.
  • If you are in your 30's and wish to retire in 5 years, expect to live for another 30-40 years! Basically forever! So your retirement nest-egg should last that long.
  • How about a corpus which never depletes throughout your retirement? For  this to happen the interest earned by your corpus should be more or at least equal to the amount you withdraw from it for your expenses. This is known as a perpetuity.
  • In real life this means that the interest earned must be much much greater than inflation.
  • Of course this is impossible unless one adopts a high-level frugal lifestyle. That is my expenses to a large extent are only weakly dependent on inflation. So I can assume yearly inflation in retirement to be quite small (compare to real inflation) or even zero!
  • This means I can just take my entire corpus and put it in an FD and simply get monthly interest for the rest of my life.

I was fascinated by this scenario and I have made an ERE calculator to see if this is possible.  Play with it and see if you can pull this off. Is this possible in India? Why/Why not? I recommend treating this calculator as an educational tool primarily. Use this in conjunction with the 'When Can I Retire?' calculator to learn more about the factors that influence the road to retirement. To keep things simple I have removed some features that are part of the other retirement planners.

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Unfortunately there is, or at least can be, a big difference between: "When I WANT to retire" and "When I CAN retire" WANT is governed by job pressure, stress, burnout etc. CAN is unfortunately governed by how one can save, inflation, interest rates, life expectancyFind out when you CAN retire using the excel based calculator. Using the calculator is pretty much self-explanatory. Some additional notes are given below: Notes:
  • Financial instruments like EPF, NPS, PPF and long-term equity investments dont attract tax on maturity or withdrawal. If you build your retirement nest egg with these you dont have to pay tax
  • Estimated tax rate on your pension is calculated in the following way: Assume you earn Rs. 1 lakh a year and your monthly expenses are Rs. 30,000. Your taxable income them is Rs. 12 lakh (ignoring other sources and 80 C deductions for simplicity). The calculator calculates the tax payable per month if your monthly income = monthly expenses (that is Rs. 30,000). This will be typical situation when you retire. The pension you get will be predominantly used for expenses and not for investing. So it should be lower than or at best equal to the present tax payable per month for a monthly income of Rs. 30,000.
  •  Do as directed in cell 'C12' until results are displayed.
  • The money flow chart worksheet gives a detailed view of how your corpus will grow year-on-year to retirement and deplete year0on-year after retirement.
  • If you wish to and if you can retire early at say, age 45, you should assume will live at least until 80. That is a good 35 years in retirement. You are not ready for retirement until and unless you have a corpus which will give a inflation-indexed (increase with inflation each year) pension for 35 years. Of course you can supplement it with part-time work, but it is best to not reply on this too much. If you do it will be come a full-time job before you know it.
  • Why did I do this calculator? I didn't do this calculator for my use. I use the retirement calculator that is uploaded in the 'Calculators Offered' tab. This uses the same mathematics as the other retirement calculator with one important difference which interested me and  may also interest students of finance. In a compound interest problem if the principle is fixed the period or time (in this case time to retirement) can be found out easily. If the principle varies (increase or decreases by a set rate) each year then the problem cannot be solved by algebra and therefore by excel. I have made a simple workaround in which the user iteratively arrives at the answer.

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Retirement Calculator: Comprehensive Version

This is an advanced retirement planner. It is comprehensive and therefore complicated. If you don't know much about retirement planners, read this first. Then use this beginners version to get used to the kind of inputs needed. You could then try the Lite version of retirement planner first.  Once you are comfortable about what is happening you could use this.

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