People are looking to retire earlier around the age of 50. In some cases, they are also looking to retire in their mid-forties and spend their time either pursuing their private ventures or their passion.
The previous generation had a very clear career goal. They would join a large private company or ideally a government organization immediately after college. Then they would spend the next 38 years in the same organization and retire with a decent corpus in the form of provident fund, gratuity and spend the remaining time with their pension benefits. A lot has changed in the last 30 years. For example, people are looking to retire earlier around the age of 50. In some cases, people are also looking to retire in their mid-forties and spend their time either pursuing their private ventures or pursuing their passion.
However, all this is easier said than done. To decide to pursue your passion much earlier, you need money and more importantly you need to plan for that money. The power of compounding plays a large role. Obviously, if you were to hit a jackpot of big money, then it is a different story altogether, but you surely cannot plan for that. What you can plan is for your retirement by saving more and by taking more calibrated and calculated risks on your investments.
How saving and risk make a difference to your risk corpus
Peter Lynch used to say that the best of ideas should be simple enough to illustrate with a piece of chalk. Let us illustrate this entire retirement story with a simple table…
|Monthly Saving in SIP|
|Monthly Home expenses|
|Rate of annual inflation|
|Plans to retire at|
|Invested money in|
|Yield on Investment|
18% (with tax shield)
|Monthly expenses on retirement (inflated)|
|Annual running expenses|
|Invested in liquid funds|
|Corpus required on retirement|
|Actual Accumulation on retirement|
|Monthly SIP actually required|
Let us look at each of the cases individually for the inferences…
# Mr. X is going to remain way short of his required retirement corpus even after 30 years. He has to either increase his monthly SIP four-fold, which is almost impractical, or take risks in equity funds rather than in debt funds.
# Mr. Y is definitely more comfortable than Mr. X when he plans to retire at the end of 25 years. He can either postpone his retirement by a few years or look at increasing his monthly SIP allocation from Rs 15,000 to Rs 25,000
# Mr. Z is perhaps best poised to achieve his goal of retire at the age of 45, although he may be required to marginally revise his monthly SIP upward from Rs.20,000 to Rs.28,000. This can also be handled through a stepped up SIP.
But how do you put all these permutations and combinations together…
That is what a financial plan simulator is all about. Imagine a platform that not only advises you on how to retire early but also advises you on the right investment mix, the right amount of expenditure, factors in inflation and also monitors the plan. Here is how the simulator will function in practice…
Step 1: The simulator will consider your existing financial plan, your risk appetite and your current accumulation and figure out how much you need to save in equity SIP on a regular basis to reach your goal. You can work backward and calculate when you can reasonably retire from work and have enough money to pursue your passion.
Step 2: In the next step, the simulator will help you achieve your target through the combined dual effect. How does this dual effect work? All financials are a trade-off between your expenses and your savings. Here is how it works. The retirement simulator helps you to work backwards to calculate SIP based on future inflated value of monthly expenses. You can actually simulate the dual effect of a reduction in monthly spending and increase in SIP on your eventual retirement goal.
Step 3: The simulator then digests the SIP you can afford and the return you need to earn to identify the best possible options that will meet your return requirement, your risk appetite, your tax status and your liquidity needs. It will also factor in the reality that your retirement corpus will have to converted into liquid funds at least 2 years prior to your actual retirement.
Step 4: This entails the actual execution of the plan for early retirement. You have simulated how you need to adjust for the dual impact of spends and savings and work out your age of retirement. This entails working out the plan from the demand side and matching with the investment offerings on the supply side. Transaction on the platform can, of course, be totally seamless.
Step 5: The last step to your early retirement is monitoring the plan. The simulator first identifies the parameters on which the plan is going to be monitored and evaluated and suggests modifications accordingly. The big advantage of this retirement simulator is that it allows you to shift to alternate Plan B almost seamlessly.
Retiring early is all about planning and simulating the investment options. A platform that permits you to do this seamlessly can add tremendous value to your wealth.
(By Vaibhav Agrawal, Head of Research and ARQ, Angel Broking)