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.
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.
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.
Retirement Calculator: Lite Version
Now stop right there! 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. Once you are a bit comfortable you could use this Lite version and then graduate to the comprehensive version offered here.
Please note that many online versions (for example here is one by Acclipse) do not take into account all necessary features for financial independence after retirement. This is the prime motivation behind my planner.
The lite version is offered here is reasonably versatile. A couple of important features have been deliberately removed (hence the name lite) to make it user-friendly. Once you are comfortable with the setup you can graduate to the comprehensive version offered here. Please read on.