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How do you get SIP amount for early retirement (RE): Part 4

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

How do you get SIP amount for early retirement (RE): Part 4


06 Jun 2021 - Contact Sayan Sircar
5 mins read

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

Calculation of SIP amount

We have already covered

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.

Related:
This article shows that the 4% SWR rule does not work in India.

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

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.

Related:
Inflation: the impact on your goals and how to choose assets that beat it

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).

Calculation of SIP amount for retiring early

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.

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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

Goal-based-investing plan

A note on having the pre-requisites in place

At all times ensure that you have the following in place

All posts in this series

Please see below:

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Worked out case studies for goal-based investing

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<p>Walk-through: Get SIP amount for retirement goal</p>
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Topics you will like:

Asset Allocation (17) Basics (8) Behaviour (10) Budgeting (9) Calculator (13) Case Study (3) Children (9) Choosing Investments (28) FAQ (3) FIRE (9) Gold (6) Health Insurance (4) House Purchase (13) Insurance (12) International Investing (8) Life Stages (2) Loans (10) Market Movements (8) Mutual Funds (14) NPS (5) NRI (4) News (5) Pension (6) Portfolio Construction (36) Portfolio Review (22) Retirement (29) Review (7) Risk (6) Safe Withdrawal Rate (5) Set Goals (26) Step by step (8) Tax (16)

Next steps:

1. Email me with any questions.

2. Use our goal-based investing template to prepare a financial plan for yourself
OR
use this quick and fast online calculator to find out the SIP amount and asset allocation for your goals.

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This post titled How do you get SIP amount for early retirement (RE): Part 4 first appeared on 06 Jun 2021 at https://arthgyaan.com


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