How often do we dream about early retirement ? Usually this feeling kicks in since we are generally surrounded in a stressful environment and we look for opportunities to take a break from them. The more commonly used terminology is “taking Sanyas” or moving up the hills to lead a peaceful stress free life.
Have you ever thought of an early retirement like at the age of 45 Years-50 Years? Are you aware of the best retirement plans that are currently being offered for the Indian markets? Is there any kind of best retirement plan in India?
What is a retirement calculator? What is the average retirement age in India? What should be the average retirement savings by age – let’s say by 55 or 60 years?
I have asked these questions to my clients who come to me for financial advice. All of them wanted an early retirement but, none of them had any definite answer to any of my questions. They had not thought in depth about the retirement plans and how to reach their goal of an early retirement. Before we go any further on the amount of savings required for an early retirement, let’s try and answer the questions that were raised above.
The average age of retirement is still between 55 – 60 years in India.
Best retirement plan in India
There is nothing called best retirement plan in India. If any of your advisor has been promising you with the best retirement plan in a single product, he is fooling you. The most ideal way to plan one’s retirement is by investing smartly in different debt and equity products.
Early Retirement in India
Most of us in India start planning for their retirement at the age of 45, expecting another 15 years of service. I was approached last week by one of my client Suresh, who wanted to retire by 45. He had come to me to help him plan his early retirement. I hope this will help you too in case you are planning for an early retirement.
After completing his formal education with a BE & MBA degree, Suresh joined the IT sector in 1997 and started his career with a modest salary. Soon he stated a systematic investment a.k.a. SIP of Rs. 7500/- in Franklin India Blue-chip fund at the age of 25. Being a smart planner himself, Suresh had set a targeted growth plan of his investments based on his annual appraisal increments. Since he was getting annual increments of around 10% every year, Suresh increased the SIP amount by 6% every year.
He also started a PPF account, but invested small amounts for the first 10 years. Post that, he increased the annual investments in PPF from his annual bonus.
Suresh got married at the age of 27. His wife Aarti was a home maker and they were blessed with a baby girl Anjali during the second year of their marriage. Anjali is currently in her 12th standard and is preparing for her board exams. She plans on to take up engineering like her father post this year.
At the age of 30, Suresh purchased a 3BHK apartment in Pune. The total cost of the apartment at that time was around 18 lakhs for which he had taken a home loan for 15 lakhs. Suresh was able to manage the EMI’s since he was recently promoted and with the annual increments in his salary on a year on year basis in the past years. Additionally, an overseas assignment for 2 years acted as an added advantage and this helped Suresh to pre-close his home loan in 10 years.
Suresh was getting being promoted on a regular basis and along with an increase in his salary packages since IT sector was booming in India. He changed the jobs for better opportunities and that too boosted his earnings. He could give the best education to his daughter and the family enjoyed a quality life. They used to also enjoy taking a break and would look forward to their annual vacation every year.
After reaching the higher levels in the corporate ladder, Suresh was not feeling comfortable. Most of his bosses were looking for short term gains and in this process were sacrificing the long term gains. This window dressing was required for the company to show improvements in all quarterly results. But this was destroying the future prospects of the company. Suresh realised that the corporate life was affecting his health when he was advised by his doctor to take regular medication for high blood pressure.
All this while Suresh was managing his finances all by himself. Since he decided to retire early, he consulted me in early 2012 to take stock of the situation and to understand his readiness for retirement.
Suresh is having a liquid asset of around of 3.10 crores now. His savings as on date is as follows:
Equity Mutual Funds – 200 Lakhs
Public Provident Fund – 40 Lakhs
Provident Fund – 60 Lakhs
Bank Deposit – 10 Lakhs
His long term financial goals include –
- Provision for inflation adjusted monthly withdrawal of 50,000 for the next 40 years, assuming longevity of 85.
- 40 lakhs for the higher education of his daughter & 20 Lakhs for her marriage.
- 25 lakhs for setting up an endowment for supporting poor children
- 25 lakhs as reserve money for health care, changing car etc.
After allotting money for the short term goals (2nd to 4th above), he has around 2 crore, which can be earmarked for his retirement planning. I suggested the following strategy for investing this 2 crore.
- Invest 90 lakhs in debt mutual funds and withdraw 50,000 per month through systematic withdrawal on the 1st of every month. He can increase the monthly withdrawal limit by 6% every year to offset inflation. 90 lakhs will be sufficient for this withdrawal for the next 15 years.
- Invest the balance 110 Lakhs in diversified equity funds for the next 15 years. Assuming a 10% CAGR, this will grow to around 4.5 crore in 15 years. He can then invest 3.6 Crore in debt mutual funds and plan for monthly withdrawal of 1.2 lakhs on a monthly basis from the 16th year onwards. This 1.2 lakhs will be the equivalent of today’s 50,000 assuming inflation at the rate of 6%. He can also increase the withdrawal amount by 6% every year to offset inflation. 3.6 crore is sufficient for this withdrawal till his age of 85.
- At the age of 60, Suresh will also have 90 lakhs as surplus amount (4.5 Crore -3.6 Crore = 90 lakhs) and this amount can be used for gifting to grand children or any other goals, which he can decide upon.
Suresh has already submitted his resignation and is currently serving his notice period. He will be relieved on 31st March 2017.
Factors that helped Suresh for early retirement
- Starting an SIP of 7500 from the first year of his job and increase in the investment by 6% every year. This investment is now worth 2 crore.
- Starting PPF at young age and investing smaller amounts in the initial years. He increased the contribution in the later years when he started getting financial incentives.
- Not withdrawing from Provident Fund even on changing jobs.
- Purchasing only one house for self-use through home loan and clearing the loan amount in 10 years.
- Giving quality education to his daughter who is a topper in her class.
Retirement Calculator is tool where you can calculate the amount of money required at the time of your retirement.
Where he missed the bus
Even though Suresh has done well with his investments, he missed the bus in one area – Health Insurance. Since he and his family were already covered under the corporate health insurance, Suresh never thought of purchasing a health insurance in his personal capacity. But at the age 40, when he consulted me for the first time, I recommended him for a high value health insurance. But since he was already under medication for hypertension, the insurance company rejected his proposal. Later on Suresh purchased a separate policy for his wife & daughter to cover their health insurance requirements. After resignation from his current organisation, Suresh will be meeting his medical expenses out of his savings. This scenario could have been avoided if Suresh had purchased a health insurance policy when he was young and healthy.
Suresh is not planning to sit idle for the rest of his life. He is already having an offer to join a management institute as a part time professor. He will be paid 1 lakh per month for working there for half day. Teaching is his passion and he plans to take up on this passion post retirement.
For the last 5 years he is very active in philanthropic activities. He is supporting 5 poor children for their school education by paying them Rs. 2000/- per month. He is also planning to scale up on this and plans to support around 30 – 40 children for their educational needs. The salary from his new part time assignment will be used for funding the educational needs of the poor children.
Do you also want to retire early like Suresh and use your free time to achieve your passions?
The simple mantra to achieve this is – Don’t just sit…instead “Start Investing Today.” You need to act wisely and start investing in SIPs and continue to do so with proper review and rebalancing.
In case you feel that you are not able to plan your early retirement, consult a fee only financial planner who can help you with this.
This post is written by Melvin Joseph, who is a Sebi Registered Investment Advisor and runs a financial planning firm, Finvin Financial Planners in Mumbai. He can be reached at firstname.lastname@example.org