I read an interesting article where someone wanted to know how much they need to invest to accumulate Rs. 5 crores by the age of 45. It would be interesting to see how I would answer that question. I was also wondering if there are enough tools on my blog to be able to answer such questions.
Before we begin, here is some more information --
- Age of the person: 32
- Planned retirement age: 45
- Current investments: Rs. 18 lakhs
- Home loan: Rs. 20 lakhs paying EMI of Rs. 25,000
- Net take home salary: Rs. 1,10,000
Unfortunately we don't have any information about their current or anticipated retirement expenses. Conveniently the article assumed expenses of Rs. 25,000. I will go with that. So the savings will be Rs. 1,10,000 (salary) - Rs. 25,000 (EMI) - Rs. 25,000 (expenses) = Rs. 60,000.
Is retirement at 45 possible?
The inquisitor wants to retire by 45, but it is feasible? Given the information, according to my calculator -- yes! Basically I used the how soon can you retire calculator. Plugged in Rs. 60,000 for savings, Rs. 25,000 for expenses at retirement in today's value, age as 32 and current investments as Rs. 18,00,000. If I left everything in the calculator as default then they could retire at 39. The tool expects the person to increase the SIP at a rate of 10% every year.
Of course there are a lot of assumptions involved. Lets say if I go with expenses of Rs. 40,000 instead of Rs. 25,000. Then the savings will be Rs. 45,000. Going with those numbers, we get a retirement age of 45.
Alternatively we could become more conservative and change the withdrawal rate to 3%, inflation to 9% and returns to 8%. With the original savings of Rs. 60,000 and expenses of Rs. 25,000 that person can still retire by 45 :). You could play with the numbers as much as you want and still arrive at 45 assuming your savings are much greater than expenses.
How much to invest?
Of course the original question was not whether the person can retire by 45 or not. They wanted to know how much to invest to retire by 45 with Rs. 5 crores. To answer this question I used the how much should I invest calculator.
There is no direct way to input the required corpus of Rs. 5 crores in the calculator. So we will fiddle with the numbers a bit to get the desired corpus. I left all the defaults in the calculator and plugged in the following numbers
- Rs. 60,000 for retirement expenses in today's value
- current investments as Rs. 18,00,000
- age as 32
- retirement age as 45
- withdrawal rate as 3% which I think is conservative
The calculator wants them to invest Rs. 90,000 per month for the first year. Then the SIP has to be increased by 10% every year. If the expenses are Rs. 60,000 then they will be left with a savings of only Rs. 25,000 which is a far cry from the Rs. 90,000 that the calculator advised. So it is simply not possible to retire at 45 with Rs. 5 crores given the current income and expenses of the person.
Can we do something about it?
Unfortunately the person has some unrealistic expectations. They can either delay the retirement age or reduce corpus required. If they half the corpus requirement to Rs. 2.5 crores, then retirement at 45 is possible. Alternatively, a corpus of Rs. 5 crores at the age of 52 is also doable. If both requirements are to be met, there is no other way other than to reduce expenses drastically or increase income. I don't think is reasonable to expect anymore reduction in expenses since out assumption of Rs. 25,000 is already very low. So the only solution is to increase income.