How do you get SIP amount for early retirement (RE): Part 4
Walk-through: Get SIP amount for early retirement (RE)
Walk-through: Get SIP amount for early retirement (RE)
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:
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
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.
The following needs to be done in this order:
At all times ensure that you have the following in place
Please see below:
This article discusses how to plan early retirement in the face of lifestyle inflation and lack of health insurance for an investor in their 40s.
Published: 8 December 2024
7 MIN READ
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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