Last Updated on June 30, 2023 at 9:44 pm
A reader says, “In many personal finance forums, I see comments like I have accumulated 25X or 30X for retirement. Many claim that 30X is when one becomes financially independent and even ready for early retirement (FIRE). Can you please write an article explaining what this 30X refers to and how it signifies financial independence?”
What is 30X? 30X refers to the retirement corpus that is thirty times a person’s current annual expenses (X). 25X, 45X etc., are all corresponding multiples of X.
What does 30X mean in retirement planning? Suppose my current annual expenses are Rs. 12 lakhs. I expect inflation after retirement to be about 6%. I expect the post-tax return on my investments also to be 6%. I need money for 30 years after my retirement. What is the corpus required?
The answer is 30 times the annual expenses or 30X! If we want money for 25 years, the answer is 25X and so on.
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Is this the right way to do retirement planning? Tricky! Notice that the expected post-tax return and inflation are the same. So the “real return” is still the same as before (0%). We can change the inputs to 12% inflation and 12% post-tax return, and the answer will still be 30X for 30 years.
A 6% inflation estimate with a 6% post-tax return is reasonable, but at 12% inflation and 12% post-tax return, the risk of depletion of the corpus in our lifetime is much higher. So it depends on how reasonable the inputs are.
Here, Corpus divided by annual expenses (in the first year of retirement) = 30. We get the withdrawal rate (WR) if we invert this ratio.
The WR for 30X and zero inflation is 3.33% which is quite reasonable and slightly conservative. Using a bucket strategy, we can lower the corpus required and the WR by about 0.3%-0.4%
Suppose we change the no of years in retirement from 30 to 25. The WR becomes 4%. This is on the higher side, and a more detailed calculation is necessary. See: Why we need to stop using Safe Withdrawal Rate (4% rule) for retirement planning.
So these multiple are not reliable. However, I would still consider 30X as the threshold of financial independence. Is this piece of information alone enough to retire on? Certainly not.
We need to check out well we can combat poor sequence of returns after retirement, especially in the initial years. This is why a detailed calculation is essential: What is the retirement corpus required to draw Rs. one lakh monthly as income?
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