Any mention of early retirement automatically triggers the next question – How much money is enough to retire early in India?
Depending on the participants involved it always makes for a fun cocktail party discussion.
Add some alcohol into the mix and the chatter becomes even more animated.
The numbers fly around like missiles. 3 crores, 5 crores, 10 crores, 20 crores, 50 crores.
And by next morning everything is forgotten.
If you are reading this article, it means you are keen to dig deeper and find out how much money is enough to retire early in India.
You are no longer satisfied with the usual cocktail chatter about early retirement.
So let us jump right in to figure out how much is enough to retire early in India by 45, 50 or 55.
How Much Money Do You Need to Retire Early in India?
The amount of money you need to retire early in India is a sum that generates sufficient income to cover your living expenses in retirement with a reasonable margin of safety.
This sum of money is commonly referred to as your early retirement corpus or your retirement nest egg.
Before we go any further, there is one concept which is extremely critical for you to understand.
Your early retirement corpus does not decide what your monthly living expenses should be.
Your future living expenses dictate your early retirement corpus.
It is a subtle but a crucial difference as you figure out the retirement corpus you need.
All too often articles in the media keep their focus on the early retirement corpus number.
A substantial number is eye-catching and makes for a good headline.
However, they overlook the more critical part.
How much money you need to retire early in India is based on the life you choose to live in retirement.
Your living expense is not a random number over which you have no control.
You get to decide what your future living expense will be.
And that in turn dictates your early retirement corpus.
Calculating Your Future Living Expenses
Let us assume you are a 33-year-old and would like to retire early when you turn 45, 12 years from now.
At this age we presume you have good visibility on the known unknowns of early retirement planning.
Now let us say your current living expenses are 1,00,000 rupees per month.
How are you supposed to figure your monthly living expenses when you are 45?
A straightforward way is to take your current living expenses and calculate the impact of inflation over the next 12 years.
So, in our example, we will take 1,00,000 rupees and subject it to inflation over the next 12 years.
This will give you an estimate of what your future living expenses will be.
That brings us to the next question – What will the inflation in India be for the next 12 years?
Let us start with a discomforting thought.
No one can accurately predict what Indian inflation will be like for the next 12 years.
Not you, not me nor any expert on TV.
The only thing we can do is to look back at history and make some guess about the future.
We can look at the history of Indian inflation and assume the trend will continue.
Basis this we can assume that future inflation may range around 6% per year.
This may turn out to be too optimistic or too pessimistic. However, we will only know that in hindsight once 12 years have passed.
But for our current purpose it is a reasonable assumption to make.
So, we take your 1 lakh monthly expense and subject it to 6% inflation per year.
You can use any online compound interest calculator to do this exercise.
The simple rule of 72 shows that your living expenses in 12 years will double to 2 lakh rupees per month.
For sake of simplicity, we assume that your lifestyle will remain the same during the next 12 years.
(In real life some expenses like school fees will go away as your kids grow up.
On the other hand, some added items like healthcare may become part of your regular living expenses.)
Your personal financial plan can help you plan for these changes in your living expense.
In the next step we now calculate the size of your early retirement corpus.
Calculating Your Early Retirement Corpus
We have now established that your future living expenses will be 2,00,000 rupees / month when you retire at 45.
Therefore, your early retirement corpus needs to large enough to generate a monthly income of 2,00,000 rupees per month.
It should do that with a reasonable margin of safety also built in.
Your corpus will need to generate sufficient income for the next 40-50 years of your (and your spouse’s) life.
It should also cater for inflation after you have retired.
Getting this corpus figure right is critical. You may only have one shot at getting this right.
An uncomplicated way to calculate the size of your retirement corpus is the 4% rule.
It is also known as the 25 X rule.
As per this guideline, your living expenses per year in retirement should not exceed 4% of your retirement corpus.
Putting it simply:
Your retirement corpus should be at least 25 times (25 X) your projected annual expense in the year you decide to retire.
Now let us apply this 4% rule to our example:
In the previous section we estimated that your living expense in the year you retire will be 2,00,000 rupees per month.
This means your future annual living expense will be 24 lakhs per year (2 lakhs x 12 months).
Accordingly, using the 25 X rule your retirement corpus needs to be:
24,00,000 rupees x 25 = 6,00,00,000 rupees (6 crore)
If you have 6 crores when you turn 45 you can choose to retire early. This assumes you will continue with the same lifestyle into the future.
Will You Outlive Your Early Retirement Corpus?
A common fear that retirees have is the fear of outliving your money.
What happens if I miscalculate my early retirement corpus and the money runs out before I die?
As a result, there is a lot of discussion about the 25 X rule. There are differing opinions if this is an appropriate method to use.
It has been known to work well based on the historic performance of US financial markets in the 20th century.
Also, it considered a 30-year retirement period post regular retirement, not early retirement.
So, does it also work for Indian early retirees?
The fact is that we simply do not have a long enough history of Indian financial markets to make a reasonable study of this sort.
Therefore, the best option is to take the US model and modify it for your specific situation.
The 25 X rule is a good reference point when planning for your retirement corpus.
At the same time, it should not be considered some magical or perfect formula.
You should modify the 25 X rule for your specific situation and circumstances.
It is also important to have the flexibility to dial up / down your living expenses as required by circumstances in the future.
We now look at factors that will help you modify this 25 X rule to suit your specific needs.
Factors That Impact How Much Money You Need to Retire Early
We are all unique as individuals and have our own circumstances, choices, and values.
Several factors that are unique to you should dictate your early retirement corpus.
If you should have 25 X, 35 X or even 50 X of your annual living expense as your target corpus will vary for each of us.
Some of these factors will require that you build a larger margin of safety, while others less so.
The Stage of Your Early Retirement Journey
We started our calculation by assuming your current expenses as 1,00,000 rupees per month.
If you are just starting on your early retirement journey, there is some good news.
You may be able to live at a much lower cost of living compared to what you have become used to.
Lowering your living expenses in a sensible manner is the second pillar of financial independence.
If you can lower your living expenses, it also lowers the retirement corpus that you need to aim for.
Let us assume that you can cut down your current living expenses by 25%.
You go down from spending 1,00,000 to 75,000 rupees per month.
Using our inflation assumption of 6%, it means that your future living expenses will only be 1.5 lakh instead of 2 lakh rupees per month.
That translates to an annual expense of 18 lakhs.
Using the 25 X rule this means your retirement corpus only needs to be 4.5 crores.
You should calculate your retirement corpus only after you have adjusted your current living expenses.
This will give you a more realistic estimate.
Your Post Retirement Plans
A key motivation for early retirement is the opportunity to spend more time doing the things you love.
But what you choose to do after your early retirement has an impact on the margin of safety you should build into your retirement corpus.
You may intend to spend your time doing volunteer work for no monetary compensation.
If so, you should consider building a higher factor of safety into your corpus.
On the other hand, if you plan to start a hobby business, work part- time or do any work that brings in some income then you need a lower safety cushion on top.
Also, your spouse may choose to continue in his/her career even though you have quit your job. Such a secondary income could cover part of your living expenses.
You can also consider any future inheritance likely to come your way.
That too can lower the margin of safety you need to build into your retirement corpus.
There is one important caveat when pursuing this model.
When the next recession comes, your retirement corpus will take a temporary hit.
This means that the income that your retirement portfolio is generating will dip down too.
Therefore, any secondary income you are generating should ideally not be linked to any moves in the financial markets.
This is to ensure that the income from your corpus and secondary income do not go down at the same time.
Your Industry and Skills
If you run out of money 15-20 years after you leave your job it will be exceedingly difficult for you to get back into the labour force.
This is more so if you work in a rapidly changing industry like IT. Modern technologies can make your past knowledge and skills redundant.
As a result, your chances of getting employment after a gap of 15-20 years would be incredibly low.
Therefore, the greater the chances of your work skills becoming obsolete, the greater the margin of safety you should build into your early retirement corpus.
There is also an alternative path.
You can switch to part-time consulting or freelance project work in your industry for a period after leaving your job.
This can have multiple benefits.
You will not need to take any immediate income from your retirement corpus.
This allows your retirement corpus to compound to a larger amount over the next few years.
Your skills too will remain up to date. This also gives you the option to return to a full-time job should you so desire.
This working model will still give you greater control over your time to pursue other interests.
Are you someone who gets worried quickly or do you stand calm even as a storm rages around you?
The more conservative your attitude to risk, the more safety you should build into your retirement corpus.
Dealing with income uncertainty is much easier when you are still in a job and bringing in some income.
Once you are living purely off your retirement corpus, the emotional impact from any downturn in the financial markets will be much greater.
Your attitude to risk will continue to change as you grow older. Nature has programmed us to avoid risk as we age.
The asset allocation of your retirement corpus should align with your personality.
You are unique when it comes to your personality. Your early retirement corpus should reflect this fact.
Future Healthcare Expenses
A big uncertainty during your retirement years are expenses you will incur on healthcare.
You may also incur expenses to cover assisted living with a full-time care-giver / nurse.
Do also consider your family medical history. It serves as a guideline to forecast if you too are likely to have some medical issues in your later years.
There is another aspect to healthcare costs.
Medical inflation (the cost of health care) tends to run almost double of normal inflation.
In our case since we are working with a 6% general inflation. So, your healthcare costs will grow at 12% (or higher).
Your retirement corpus thus needs to cater to this major uncertainty.
This can be done either through buying health insurance or self-insurance.
(You will not have any employer sponsored healthcare once you leave your job).
If you are buying health insurance the premiums should be included as part of your living expenses.
Under self-insurance you set up a separate sum of money on top of your retirement corpus.
This separate pool of money is supposed to take care of any unexpected medical costs.
This should be built into the margin of safety above 25 X when planning your retirement corpus size.
Retirement Corpus Simulation
The last step to figure out how much money you need to retire early in India involves a retirement corpus simulation.
Given the information so far in this article, you should be able to estimate your early retirement corpus.
Even though these calculators use US data, they are good for simulating an early retirement corpus in India too.
Both sites have information about the value and limitations of these early retirement calculators.
A few adjustments you can make:
You can use rupee figures instead of US dollars.
Use a flat rate of inflation assumption since Indian inflation runs much higher than US CPI.
These calculators will run simulations and tell you the chances of “retirement corpus failure.”
A failure in this case means chances that you run out of money during your retirement.
It is important to note that these simulators and guidelines are just informational tools for you to use.
They should not be taken as professional financial advice.
You should always consult a qualified professional to get a second or third opinion on the robustness of your early retirement corpus.
Figuring out how much money you need to retire early in India is the cornerstone of your early retirement plan.
Getting it right is important to ensure a smooth post-retirement life.
The lifestyle you choose dictates the early retirement corpus you should aim for.
So first choose the life you want to live and then start to save for it.
The 25 X rule provides a good starting point to begin your early retirement corpus planning. It needs to be then modified for your specific situation.
The key is to be flexible.
No one can predict the future rate of return in financial markets with absolute certainty.
The only thing you can control is your spending and lifestyle.
Do not focus too much on a specific number when you start saving for an early retirement.
Instead focus on making meaningful changes in your living expenses.
That will dictate how much money is enough for you to retire early in India.
Dushyant Choudhary is the founder of dushyantnomics, an early retirement blog for professionals. Dushyant retired early from his 9-5 corporate life after a successful international career. He brings his knowledge and experience to his current role where he’s dedicated to helping professionals achieve a fulfilling retirement.