I’m a 30-year-old private sector employee, and I want to retire at 45. How should I plan for this?

I am a 30-year-old earning a monthly income of Rs 1 lakh at a private company. I want to retire at 45. How should I go about planning this? Plus, I prefer non-market-linked investments. 

Name withheld

Reply by Rahul Jain, President & Head, Nuvama Wealth 

The first step in retirement planning is calculating your retirement corpus. Retirement corpus is the investment fund you must have by the age of 45 to generate a regular income (net of tax) to cover household, lifestyle, medical, and travel expenses, among other things. These costs will be adjusted for inflation and taxation. Furthermore, this corpus must be large enough to last you and your spouse’s expected life span of 90 years.  

The starting point is the calculation of expected expenses at the age of retirement, which in your case, is 45. These expenses must then be inflated, assuming a realistic inflation rate of 6-7% until the age of 90. The future expenses must then be discounted using an after-tax FD interest rate. This is the retirement corpus.  

This is illustrated using the example: Assume your monthly expense is Rs 75,000, which is Rs 9 lakh annually. This expense, inflated by 6% till retirement, will grow to around Rs 21.50 lakh, which will continue to grow at the same inflation rate for the next 45 years. If we discount this using an FD rate of 6%, the approximate corpus you will need is Rs 9.50 crore. To achieve this in 15 years, you will need a SIP of Rs 2.30 lakh per month, assuming the SIP compounds at 10% every year. At present, you may not be able to meet the target savings. Hence, the corpus must be reworked either by lowering the expense or postponing the retirement age. 

This may be a bit technical and complicated; however, numerous online financial calculators and apps can help you precisely calculate the required corpus.  

After calculating the retirement corpus, you must work backwards to determine the monthly investment required to build the corpus in 15 years. This iterative process will result in the monthly investment amount and corpus that is best for you. During the process, you may need to adjust your post-retirement expenses, which might call for changes in your lifestyle to save more. Even the type of investment, the combination of equity and debt, and the risk you are willing to take will be determined by the corpus you need to build, the monthly savings you can make, and the risk you are ready to take. 

Because this is a long-term goal, building the corpus with equity and debt is prudent. Furthermore, it will reduce your monthly investment amount. Remember that retirement goals vary widely, and thumb rules may only apply to some people.  

Since it is a moving goal with incomes and expenses subject to changes and the assumptions related to inflation and taxation, the plan must be reviewed at regular intervals. Retirement planning is a critical activity, so the help of professionals such as certified financial planners must be sought. 

(Views expressed by the investment expert are his/her own)