Retire @ 40 : Right Planning for An Early Retirement

A young and charming couple Ankit and Anchal, aged 27 years came to us for financial planning. Anchal works with a pharmaceutical company as an Analyst and Ankit work as Product Manager in an E-commerce company.  They asked us several questions, one of them was, ‘We want to retire at 40, Is it possible?’ Post 40, Anchal wants to teach French and Ankit wants to start an NGO.

Both, Ankit and Anchal is 27 years old and planning for a baby at around 33. They are planning to pursue their interest in respective fields till the age of 60 years and later want to enjoy retirement. Till 40, the couple is expecting to increase their salary by 7% p.a.

Ankit has a shop in his hometown, where he earns Rs 10,000 per month. They didn’t want to include it in their retirement plan. So, we linked this monthly amount with their financial goals related to their child’s education and marriage. 

 

We worked on a bucket strategy for ensuring happy retirement at the age of 40.

In this financial planning calculation, we have represented values on an annual basis. However, we suggested them to execute the plan on a monthly basis.

Bucket A:  Age 28 to 40 years

Surplus amount [Gross Income – Gross Expense] was suggested by us to be invested for 13 years. Hence, the surplus investment made at the age of 28 would be useful to take care of expenses at the age of 41. Thus, expenses would be taken care of, till 53. 

Bucket B: Age 41 to 53 years

Surplus saving at the age of 41 years [Rs. 28,50,449] would again be invested for a period of 13 years, which would take care of the expenses at 54 years. However, expenses are rising at 6% inflation rate.

The couple expects to receive a combined income of Rs 1,50,000 per month from the NGO, dance and French classes. This amount which they would receive till the age of 60 would be utilized in Bucket D.

Bucket C: Age 54 to 63 years

Surplus saving at the age of 41 [Rs. 28,50,449] would become Rs 1,56,55,838 at the age of 54. And hence, the corpus is more than enough to meet the expenses at the age of 54.

Corpus accumulated at the age of 61 was due to the investment made at the 48^th year from surplus saving. This amount is more than enough to meet expenses at the age of 63.

Bucket D: Age 64 to 80 years

After full-time retirement at the age of 60, the couple also expects to reduce unnecessary expenses. We create basket D at the age of 64 because the surplus saving at the age of 51 is not enough to meet expenses at the age of 64.

So, we decided to use the corpus which has been built since age 41 from the combined income of Rs 1,50,000 per month.

However, the interesting thing is that corpus accumulated since age 41 from the combined income of Rs 1,50,000 per month would be sufficient to take care of expenses tillage 80.

 

Apart from the retirement plan at 40, Ankit and Anchal also have surplus to save for their foreign trips after 40. Proper allocation of funds can accumulate enough amount of corpus for the couple to arrange four foreign tours any time after age 40.

For a child’s education, the couple would have sufficient time to build the corpus. However, we suggest the couple to set a target of Rs 1,70,00,000 [Education inflation cost at 7% p.a].

To reach the goal, we suggest the couple contribute Rs 5,000 every month to Equity Mutual Funds. Mutual Fund SIP amount would be arranged from their shop’s rent.

For their child’ marriage, which might be approximately 34 years later, the couple would have had an advantage of compounding. However, we suggest the couple to set a target of Rs 1,40,00,000 [Inflation cost increases at 5% p.a].

For achieving this goal, the couple needs to allocate only Rs. 2,500 in the form of monthly SIP for the next 34 years.

The couple would successfully be able to allocate funds towards their child’s future goals because of the right decision at an early stage. If the couple delays the financial planning for their child’s education till the time his/her schooling starts, then the couple would be left with only 20 years to invest. Now, in the same situation, the couple needs to start Mutual Fund SIP of Rs 15,000 instead of Rs 5,000 currently. This makes all the difference.

This plan works for most of the couples who are focussed regarding their plans. However, above all, they have proper guidance to allocate funds at the age of 28.

One should not wait for a certain age to start saving or channel funds, rather, start early to get the benefit of compounding.

NOTE: Current and Future Cost are not mentioned in the blog.