Walk-through: Get SIP amount for early retirement (RE)

We have already covered

• how and why to set a goal
• how to get asset allocation for a single goal
• how to get SIP amount for a single goal
• how to get SIP amount for a goal with multiple payments
• how to get SIP amount for traditional retirement

We will extend the concept developed while calculating for traditional retirement (the usual at age 58-60 years) to develop a model for calculating how to save for early retirement.

There are a lot of literature out there that calculates a target corpus and finds out a way of drawing down that corpus (the safe withdrawal rate or SWR). We will sidestep that debate regarding how much SWR to assume by directly saving for each year of early retirement starting with the year before retirement first.

The model will have two parts:

• traditional retirement modelled like this
• early retirement modelled one year at a time

📚 Table of Contents

☰

• Creating the model
• After one year of running the SIP
• A note on having the pre-requisites in place
• All posts in this series

Creating the model

The model deals with a 33-year-old salaried individual with retirement at age 58 (25 years from now) who is also targeting retiring 15 years earlier. We will assume a figure for annual expenses if traditional retirement happened today (6 lakhs in the example), model it forward by 25 years of inflation (at 7%) and then use the figure to save for each year of early retirement. Estimation of the expenses in retirement is covered in more detail here.

One major assumption here is that the other goals like children’s education, travel, and house purchase are separate from the expenses in the RE period. If this is not possible then the RE goal will be delayed. A more aggressive asset allocation and conservative growth of SIP values are assumed to indicate the lower priority of this goal vs. traditional retirement.

Expenses i.e. the present value of target goal amounts will be

• Year 1 in retirement: 6 * 1.07^25 = ₹ 32.56 lakhs
• Last year in RE = first year before retirement = ₹ 32.56 / 1.07 = ₹ 30.43 lakhs
• Second last year in RE = second year before retirement = ₹ 30.43 / 1.07 = ₹ ₹ 28.44 lakhs etc.

The model will start with saving ₹ 30.43 lakhs at a goal horizon of 25-1 = 24 years, ₹ 28.44 lakhs at a horizon of 23 years so on and so forth for 15 years.

There is also ₹ 35 lakhs of lump sum available for investment that must be allocated to the “First Year before Retirement” goal and then onwards to the next. At any point, the corpus value must be allocated to the oldest RE year since that is the highest priority goal (you can RE only in the last years before actual retirement).

These calculations are explained in this Google Sheets workbook.

As expected, RE requires significant monthly investment starting from the present day and requires careful balancing with the other goals, EMIs for house purchases and expenses/investments related to children’s education.

After one year of running the SIP

The following needs to be done in this order:

• find the new corpus which is the sum of the current value of equity and debt fund values
• review the goal parameters (new horizon is 1 year less, review the current cost of the goals to adjust for actual market inflation etc.)
• re-balance between the equity and debt fund values

A note on having the pre-requisites in place

At all times ensure that you have the following in place

• An emergency fund with 6-12 months of expenses
• A term insurance policy (unless you are retired with no income)
• A health insurance policy (separate from the company-provided one, if any) for 10-15 lakhs as a base policy with a 50-100 lakhs super-top up
• A personal accident insurance coverage to safeguard against accidents where you do not die but cannot earn
• No high-interest debt like credit card or personal loans

All posts in this series

Please see below:

• how and why to set a goal
• how to get asset allocation for a single goal
• how to get SIP amount for a single goal
• how to get SIP amount for a goal with multiple payments
• how to get SIP amount for traditional retirement
• how to get SIP amount for early retirement
• how to get SIP amount for all goals together
• how to get SIP amount for recurring goals like vacations