Early Retirement in India- How much do we need

Early retirement is a dream but it is a scary thought as well. We have read through a lot of stuff about how much you need to retire. Most of the work done is not in Indian context but we believe a lot of concepts are actually same.

We have used a few blogs and articles for our research both Indian as well as those applicable to other parts of the world. This is probably going to end up being a series since there are a lot of concepts which have contributed to our final figure.

This post talks about how we have come to the number that we have. There are a lot of detailed description of our thought process which I agree might not be required all the time.

Assumptions:

Most of our assumptions are just that, assumptions a few like groceries, and utilities are based on our actual expenses these past few months. Needless to say as the assumptions change so will the calculations.

Inflation

We assume an inflation rate of 6% in all our current calculations. Many recommend 9% inflation rate but seriously I don’t believe that is required. You can run these numbers for various inflation figures if you would like.

This calculator at Big Decisions allows you to see how various components of your monthly spending will increase. It tells us that our current expense categories will inflate at about 3.33%. We know that we currently do not have a lot of expenses that come with having a child like day care, schooling and healthcare. To cater to those expenses we are currently calculating at 6%.

Home

We currently rent in the city we live but also own a flat in another city. After we retire we will definitely be returning to the flat unless we decide to settle down in a much cheaper place or end up buying another property. So in our assumptions the rent after retirement is considered 0. Though we have included maintenance charges and also assume a property tax of 30,000 per year.

Utilities

Our electricity bill has been a bit skewed with induction eating away a substantial part of it (we assume), since we now have gas connection in place we hope to go back to our earlier energy consumption level. We don’t own a AC which helps us keep our low along with the fact that we are in office the entire day and usually use the same room during evenings and night resulting in less power consumption.

Internet is our requirement so that will remain as a fixed utility. Our apartment complex allows for water to be included in the maintenance charges so that is not a part of calculations. A cooking gas cylinder of 14.4kg lasts us around 5-6 months and costs ~ 1000/- our current cylinder is 17.4Kg and cost us 1200/- we assume it will last us 6 months so the cost is prorated. We do not use gas to heat water for bathing or any other purpose except for cooking.

Groceries

We are trying to increasingly cook our food at home. But we have accepted that we can’t always manage packing lunch. So we are currently ordering packed lunch from a lady who delivers home cooked food. When we retire this would go away and we would be cooking on our own. Currently I am trying to move to more organic way of life and from June’16 we are trying to buy more and more organic produce.

I hope to grow some of my vegetables especially the greens but since I cannot be sure of it I am still going to assume the same grocery bill as we usually have.

Child care and education

We might have a child in future and that would in pure financial terms mean extra expenses. Though we assume that we will be very frugal and teach our child the same values, we know we will be spending more. That is the reason why there is a child care cost column in the expenses.

We might in future decide to home school our child which would take away most of the costs.

Healthcare

We currently have very few if any healthcare expenses. They range from a cough syrup in a month to no expenses at all. Both of us are currently free of any life threatening or lifelong diseases. This is why we are hopeful we will not end up spending a huge amount on healthcare expenses. Still we have included the amount the tax-men allow us to deduct from our taxable income.

So what do our expenses come down to?


S.No. Expense Head Expenses Remarks
1 Utilities         2,000 Includes:
Electricity, Internet, Gas
2 Grocery         3,000
3 Eating Out         5,000 Based on our recent months we are working on reducing it
4 Child Care      10,000 Apparently education is very expensive and so are day cares!!
5 Parental Support      21,000 This may reduce if they decide to come live with us. Or may remain the same
6 Miscellaneous/ Other expenses 3000 No clue where these come up from but they do every few month in different roles.
7 Medical expenses 2500 This is the tax deductible amount that we have.
Total monthly expenses after retirement in today’s rupee      46,500

Taking money out

When we do retire at 40 we can expect a non-inflation affected expense of 46,500/- with some projections and an inflation rate of 6% this comes out to be 83,274.42/-. This puts our annual withdrawal at around 10 lac.

Now let us play with our projected expenses and also assume that we will not reduce any of these. Following calculations use an approximation of our expenses to show various scenarios. Let’s start with a case scenario where we have managed to accumulate 2Cr. by the time we plan to retire which is around 2026.

Let us assume that we will earn this income from our investments and return from our investments is an average of 8%.

This is how the table looks

Early Retirement
Withdrawal from 2Cr.

We should be free of child care sometime between 50-55 years, depending on how brilliant she turns out. If we are blessed with a highly intelligent child who gets scholarship for everything guess what, expenses would probably be far lower.

The trend post 60 is what anyone would be worried about- we are eating from our reserves instead of eating from our returns. A few factors can get us back into good graces, like a lower inflation rate and a higher return on our investments. Since we are all pessimists here we are not going to change these return values. We will allow our expenses to increase by 6% every year and we will let our return make no more than an average of 8% per annum.

Corpus required

How about we increase the corpus we have saved. Now I believe I am going to grace this earth with my presence for a long-long time, still being the humble being that I am let’s keep a cap of 99 years for the time I will need this money. Increasing the corpus required to 3.5crores we can easily live off our savings.

So even for a pessimistic outlook where the inflation keeps on increasing by 6% my returns don’t make more than 8% CAGR, none of us make any money apart from the returns and we don’t reduce our expenses ever we need 3.5crores to achieve a very reliable financial independence.

If we assume that any gain on our money will be nullified by inflation then 3.5 Cr will last me 35 years with the same amount of expenses. That means even if we retire at 40 with this amount we can live till 75 easily and then use the provident fund we have been continuously contributing to.

We are currently assuming that we will be living in the flat we already own so as to not pay rent. Our property has seen an increase of 30% over last 3 years but we don’t expect this gain to go on for a long time. We assume an average gain of 5% for the property price so our initial per sft rate of 2275 should go to 3705 psft by 2026.

If we do end up selling the house and investing the assets to rent somewhere cheaper in the same city we should have additional rental spending of 2.4 lac. Since in our super pessimistic view returns equal inflation, we should be able to easily live for over 16 years. This gets very close to the PF withdrawal timeline.

Another thing we accept is the fact that none of us can actually survive without doing one thing or another. If we end up gardening our grocery expenses should reduce and if we start teaching kids Maths and English we would be getting some income as well. If we actually go for a guest lecture in one college or another that would add to our incomes as well. Still we don’t know what we will be doing or maybe we will do nothing at all and enjoy our lazy lifestyle.

Add to this the common Indian expectation if our kid would support us in old age we just have to make do till she is around 30-35 years old. That brings us to the time when we are 70 years old and are going strong enough. We also do not expect any inheritance or windfall to happen to us in the course of our lives.

Time to summarize

Early Retirement Corpus required to sustain us and our expenses from 40 to 99:

3,50,00,000 for a scenario where average returns are 8% and inflation keeps on climbing at 6%. We also assume that our current expenses are going to remain the same.

Early Retirement Corpus required to sustain us and our expenses from 40 to 99:

2,50,00,000 for a scenario where average returns are 10% and inflation keeps on climbing at 6%. We also assume that our current expenses are going to remain the same.

 4% or 3%

We might come across as people who have a bit more courage than the rest but we are still scared ones. 4% rule makes a lot of sense on paper especially since a lot of trends and calculators show us that what we spend money on does not show the alarming rate of inflation that a lot of other items show. Also we usually buy in bulk and they tend to be a whole lot cheaper than walking around the aisles for every item you need.

We on the other hand think that a 3% withdrawal will make more sense and will provide us additional cushion in case times go rough. For our current expenses without considering a kid that comes out to be ~1.44Cr which we will require if we were to retire today. With an adjusted 10K kid expense that shoots upto 1.8Cr.

This means that as long as we withdraw 3% of the corpus and let the remaining grow, we should not run out of money. Since getting an average 3% of net return from our investments is not too much to ask for in our opinion we assume we can get out of the rat race with a little less than 2 Cr.

If we want to get to 2% withdrawal rate we will require between 2.4Cr. to 3Cr.

Tax Woes

Now let’s get to the tricky question of Taxation after retirement. Even though I am including it here for consideration we are still working out the winding lanes of tax laws.

Before we get on to how much we expect GOI will take away from us let’s talk about what we have till now discovered, as a way to save taxes starting now. We currently pay a small amount of taxes as pour loan principal and interest result in a substantial rebate. Also we don’t earn insane amounts like either. Our earnings would be considered a lower step in most corporate ladders. Our benefits stem from the fact that both of us make roughly the same amount and pay way less taxes if only one of us was making the sum both of us do together.

We are currently looking into forming a HUF (very karta oriented which I don’t like) and forming a LLP/regular partnership. We are yet to decide which way we would like to go and what our plans are for future including the time after FI. HUF seems to be the way to go for now as it would reduce our tax liabilities majorly. For following calculations we will assume that we are still being taxed as individuals and are equally dividing the income between us.

Source of income: Dividend+ PPF returns + selling some MF units or shares

Almost all of these are tax exempt as per current regulations except if we make more than 10 lac in dividends in a year. Since we will be paying taxes individually and the dividends earned would be equally divided we should be tax exempt till we get 20 lac in total dividends.

Our current holdings are mostly growth based mutual funds ( we hate paying DDT) and we will be holding each of these for well over 12 months so we do not expect to pay long term capital gains at least as per current laws. We have all the time in the world to switch to a better option in case the laws change on this.

PPF investments are EEE and looking at recent backlash that rate cuts received we can hope that it will remain the only instrument to be so. That will give us access to around 28-30L of completely tax free money when we are learning the ropes of Early Retirement

Does that mean we will have no taxes to pay?

To be honest we don’t know because tax laws keep in changing every single year and sometimes in the middle of it as well. What we do expect however is that the deductible income will keep on rising from current 2.5l per annum to 5l per annum. Even then let’s calculate how much tax we would pay if we each take out 5l per annum and all of it is taxable.

Early Retirement
Paying taxes post retirement!

This means we will have a tax liability of around 1,716 per person per month. This will definitely not put a wrench in our daily expenses but let us assume we need at least 10 l to make do. Another quick calculation shows us that we can achieve that by withdrawing around 5,35,000/- from our corpus per person.

Early Retirement
More Taxes-More Withdrawal !

We will certainly have a completely different equation depending on whether we go HUF way or not. To be true, chances are we will be free of taxes since most of our income falls into tax free status. Additionally we should be eligible for tuition fee rebate for our kid and a few health insurances.

Overall the taxes may play a big role but currently it is safe to say that we should be withdrawing tax free income after retiring early.

 

Working after early retirement

We both have varying views on it and we change our personal views every other day as well. My decisions have varied from not doing a single thing and relaxing at home to working part time or guest lecturing somewhere. In between all that has been realizing my dream of travelling the world. Depending on our family and financial situations and the global travel scenario we would probably take up the last one.

Mr. S on the other hand has toyed with the idea of working beyond financial independence, though at a job which is something he enjoys. If he keeps on bringing the money he brings in now we would be happily set for life. The problem would then be how we travel more. So let it be said that we have no clue about what we are going to do once we cross the bridge.

Thankfully we have over 3500 days and 500 weeks to come to a common strategy on how we deal with time after we/I retire. This is why I have assumed a grand total of 0 as assured income post retirement.

Another factor which needs to be considered is our freelancing income which has been more than enough to cover our travels in past few years and we hope to put it to same use over next years. We are not sure if we will simply stop freelancing or we will continue beyond 2026.

We are sure we have missed a few calculations and someone will point them out especially in terms of taxes. We also know and expect that all of this including what we earn will not match our calculation or any of the figures here. Since 10 years is still a long way to go (who knows we might win a lottery) we would be surprised if everything turns out exactly as per our calculations.

Right now we believe we can and should achieve financial independence by Feb 2026 with a minimum of 1.8Cr if we have a kid. A much more comfortable figure for us is 2.5-3Cr and we hope to also achieve it before we hit 40. Will we retire at 40 or when we reach the figures is something where your guess is as good as ours.

Right now the figure to breach is 2,50,00,000 and to achieve it you would require a regular investment of over 12-15 lac depending on the returns you get.

Is this actually right? I already have 2Cr…

Well if you do then you are a really lucky person and rich as well we on the other hand are starting from a big old 0. The question still remains whether it will be a figure that will tide us over till our old age. And the truthful answer is we are not sure but we believe that it should. I have read and reread posts like this, this and this. Most of these talk about a much higher rate of inflation and a much lower rate of returns.

It might be a case of adding factors of safety or it might be a case of us not understanding what the real market condition is.

For us, the actual expenditure to run a household has gone down in last 5 years. Most of it is by learning how much we actually need and reducing wastage. To say we live frugally will be stretching it a bit. On the other hand, a lot of our friends have grown/inflated their lifestyles exponentially yet we know of many who live in the same expensive city with half of our expenses and supporting a family.

We might update this figure in either direction as time goes on and to say we can or will retire after achieving a figure is a bit premature. What we can assure is that we will be keeping a close eye on both our expenses and investments. Right now our major focus is reducing our expenses and we know there is a lot of margin in our expenses to cut them down. I would be very happy with a recurring expense of 12k per month which will actually mean we will be spending only half of what we were when we just got married.

No Early Retirement Calculators!!!

Nope, the online calculators actually make me a bit weary and scare the shit out of me. The reason why I prefer using likes of big decision is because it does the inflation calculation. Even better is running our own excel sheet with our researched figures.

Most of the calculators and excel sheets come with their own set of assumptions formulas and guidelines. Though these are helpful it is very unnerving for me if someone recommends using 9% inflation when I strongly believe that 6% should be fine. Right now what we need is a figure we believe in however bit it is (2.5Cr. gulp!) and then formulate our strategy to achieve it. We have to believe that we can achieve financial independence first and then iron out the kinks. There is nobody stopping us from working another 5 years and still retiring at a comparatively young age of 45.

If you are in our boat this is what I would recommend you do to calculate what you need for early retirement:

  1. Know what you spend right now and on what
  2. Strike off the expenses which will not exist when you achieve early retirement.
  3. Assume rate of inflation and project the sum required when you retire.
  4. Depending on what method makes sense to you see how long the money will last you.
  5. Keep track of all your assumptions and make changes as required in you spreadsheet.

If you have a figure which you believe makes a lot of sense in your early retirement scenario put it down below.