Insights

Cheat sheet: How to retire in 20 years (or less)

May 5, 2017 . Akash Kapur

Man sitting on a bench - relaxing - indicative of man who retired early and is enjoying his life

“I’m going to work till I’m forty and then travel the world.”

Chances are you’ve caught yourself or your friend(s) voicing such thoughts at least once in the past few years. The post-retirement activity could vary – you could be planning to start a café, become a reclusive writer, or to just chill at home with your favourite books and/ or movies; but the core idea remains the same: stay in the rat race just long enough to build up a nest egg you can live off, and then quit.

The more practical-minded among you may then proceed to dismiss these fantasies as just that – fantasies that are nice to think about but won’t ever come true. However, making these dreams a reality is not that difficult. All it takes is a little planning and dedication. This mutual fund day, we’re going to show you how you can retire and start doing your own thing in just 20 years.

For this example, we’re going to be considering a 25-year old named Karan. Karan earns about Rs. 30,000 a month now and spends Rs. 20,000 on his monthly expenses – rent, food, shopping, partying, and the rest. That means he usually has an extra Rs. 10,000 which he can put aside for his goal – to retire by 45.

Assuming Karan lives till 90 – a reasonable estimate these days – he’ll need to build up enough money by the time he reaches his planned retirement age to sustain him for 45 years. Of course, this corpus he’ll build won’t be idle post-retirement – he will have to invest it in debt funds, senior citizens’ savings schemes (as and when he becomes eligible) and other such options. So, let’s assume his post-retirement returns to be around 8 per cent. Finally, we need to factor in the rise in the cost of living over time (rate of inflation). Let’s assume this to be 6 per cent.

This means Karan needs to save up a total of Rs. 2.24 crore to generate a monthly income that’ll grow in step with inflation and sustain him throughout his retirement (calculated using our retirement needs calculator). Looks like a big target, yes? But it’s quite achievable.

All Karan needs to do is to start a Systematic Investment Plan (SIP) of Rs. 10,000 a month in mutual funds. He will need to increase his SIP investments by Rs. 3,000 each year (his yearly hikes should be able to cover this). Twenty years later, assuming a 12 percent return on mutual fund investments (a reasonable estimate for equity mutual funds), Karan would have saved up Rs. 2.56 crore. That’s Rs. 32 lakhs more than his estimated target!

Fun Fact: If he were to step up his investments by Rs. 5,000 a year instead, he would have built Rs. 3.66 crore by the end of 20 years – nearly one and a half crore more than his target! You can calculate this yourself (or for your own goals) using our step-up SIP calculator.

Of course, what works for Karan won’t work for everyone – he chose the bachelor style of life and didn’t have any dependents to worry about. So, depending on your circumstances – age, planned retirement age, expenses, dependents, etc. –  your target amount, and hence, the SIP amounts (starting and step-up) will vary.

But with the right planning, investment portfolio, and discipline, you should be able to reach your goal with ease. So, if you really want to retire early and do your own thing, remember – you can!

Just enlist the help of a good financial advisor and you can be on your way to a comfy retirement.


 

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