Dreaming of retiring early? It’s not difficult. This article calculates how much money you really need before you can retire.
Retiring early
The Indian economy has been booming for a prolonged period, and it is having far reaching impact on the way we think about earning, spending and investing.
This booming economy has resulted in some high paying jobs – jobs having salaries that were unheard of even a decade back. Even entry level salaries have gone up significantly – meaning that many young people today earn a lot more than their expenses.
This obviously results in a surplus every month. This not just gives a sense of security, but also presents an opportunity to think and do things differently than what our earlier generations did.
And here’s a trend that is fast emerging: Retiring early has become an aspiration of many of today’s young people!
They don’t want to work till the age of 60 or 65 – they want to work hard when they are young, save up enough, and retire at a relatively young age so that they can spend more time with their families, and pursue things that genuinely interest them.
Do you want to retire early as well? Let’s see what you would need.
The assumption: You want to retire in 2025.
The Calculations
What is the financial criteria to decide when you can retire? It’s simple – you should make enough money, without working, to meet your expenses!
For that, you have to consider your current expenses, and based on this, you need to find out your expenses at the time of retirement. For example, if your current monthly expenditure is Rs. 25,000, you can’t aim for earning Rs. 25,000 in 2025.
Why? Due to inflation. Inflation reduces the value of the rupee each passing day. Therefore, you need to earn a lot more then Rs. 25,000 in 2025 in order to retire comfortably.
(Please read “Saving enough is not enough – Effect of Inflation on Savings” to know more about the impact of inflation on your savings)
So, in 2025, how much would be the equivalent of today’s Rs. 25,000? Well, that depends on the rate of inflation. If we assume the inflation to average out to 6% from now till 2025, this amount works out to Rs. 67,319.
Login Required Download the spreadsheet that has all these calculations. You can change the figures as per your needs, and find the amount that YOU would need when you retire!
Rs. 67,319 – This is the amount you would need every month in 2025 to enjoy the same standard of living you enjoy today (for Rs. 25,000 a month!). This works out to Rs. 8,07,832 per year.
And how would you get this income? When you retire, you are not going to get a monthly pay cheque! The only option for you is to earn this amount as interest.
If we assume the rate of return on investment to be 7%, the amount you need to earn Rs. 8,07,832 every year is – hold your breath – Rs. 1,15,40,455!
But wait – what about the unavoidable Income Tax? Wouldn’t your interest income be subject to income tax? Of course it would be – there is no way to escape income tax!
Here we go – if we assume the average rate of income tax for you in 2025 to be 25%, the corpus you would need to retire is Rs. 1,53,87,273! Yes – it is Rs. 1.54 Crores!
Login Required Download the spreadsheet that has all these calculations. You can change the figures as per your needs, and find the amount that YOU would need when you retire!
So, now you have a clear picture of how much you would need if you want to retire early. Sounds intimidating? Unachievable? Unattainable?
NO! It is quite achievable. Now that you have a goal for yourself, you can easily achieve it if you make regular, disciplined investments. Want to know how? Please read “Goal Based Investing” for an easy, step-by-step explanation.
Happy retiring early!
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Corrected the 6% inflation:
The 7% interest rate that you assumed does not take into account the inflation rate prevalent at that time. If we consider the inflation to be around 6%, then only 7-6=1% will be available to spend. If we spend all 7%, the value of the 1.54 crore will keep on decreasing – due to inflation. Please review the amounts again.
The 7% interest rate that you assumed does not take into account the inflation rate prevalant at that time. If we consider the inflation to be around 5%, then only 7-6=1% will be available to spend. If we spend all 7%, the value of the 1.54 crore will keep on decreasing – due to inflation. Please review the amounts again.
Hi,
Thanks a lot – looks like we think alike when it comes to retirement planning!
1. Agreed – 25% is too high a rate to assume. But 5% might be too low!! Maybe 10% – 15% would be a more reasonable rate.
2. Yes, the purchasing power of money would keep reducing through our retirement, so earning the same amount every month wouldn’t help.
What you have suggested is a possible solution, but it isn’t a very parctical solution at least for an early retirement.
I have discussed this in detail in Early retirement – Why a fixed deposit (FD) is not a good choice“.
I would soon be writing about the possible ways to earn an inflation-beating income every month during your retirement – stay tuned!
Finally, thanks a lot for pointing out these. If you have been working on aspects personal finance, please do share them with fellow readers through the comments in relevant articles…
Hi,
This is an excellent article. I had been doing financial planning for my own retirement for some time and when I saw this article, bingo ! all the stuff was written. However, I have 2 suggestions to offer:
i) The Rate of Income-Tax as retirement has been taken at 25% which is simply too high. If one is retired and not getting any salary, then one would tend to fall in the ZERO or 10% slab at that time. As an average, a tax-rate of 5% can be taken, which would be more realistic.
ii) As pointed out by Noby Jacob also, the interest income from return would get eaten away by inflation gradually. This also needs to be taken into account.
The solution I have used in my retirement planning is to invest a slightly extra amount as the Principal. This delta on the principal corpus yields extra returns every year to offset the extra income required each year on account of inflation. Hence the formula I use for this is:
Corpus=AnnualExpense*(1+Inflation%) / RateOfReturn%
- I think your article will become more realistic, accurate and increase the utility for readers if you consider incorporating these suggestions.
Thanks,
Hi Noby,
You are right – inflation definitely needs to be taken into account.
However, I have done so. That’s why today’s Rs. 25,000 has been converted inot Rs. 67,319 in 2025, taking into consideration 6% inflation.
Then, we aim to earn at least that much.
You considered inflation on the present amout TILL the retirement age. But you have not considered the inflation eating out of the retirement money (1.54 crore), AFTER retiring.
I hope I am clear now.
Hi Noby,
Agreed, that has not been considered. But as I mentioned in my reply to “B”, I have written about it in detail in “Early retirement – Why a fixed deposit (FD) is not a good choice“. Please check it out.
Soon, I would be writing about how to overcome this problem. Stay tuned!
As you grow in life, your salary increases, thus your saving capability. Though article takes care of inflation/interst rate/tax at that time, it does not take care of saving potential increment. If you can save Rs. 10000/month now, after 1 year it will be definately more.
If you calculate the saving you should do every year, the value is very high even if you consider 7% earning on your savings. pl. let me know the monthly saving i should start assuming all the data given is applicable to me.
Second,, i agree with comment that tax slab should be taken around 5% only.
Thanks a lot. this is a gr8 website. I come across to this site while I was searching for home loan interest related stuff on net. really useful and gr8 articles on no of subjects..
Good work sir, I am a finance professional but i have never read before such interesting articles!