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Tuesday, December 29, 2009

Be well planned for early retirement


The trend of retiring early is catching up, thanks to increasingly demanding working conditions and ample savings and investment avenues. The
emerging trend has also got a boost from the expansion in self employment opportunities in the services sector, which has emerged as the driver of the Indian economy.

Recently, around 101 Indian Air Force pilots applied for early retirement citing suppression, emotional and medical grounds as reasons for their untimely decision. This trend of getting retired early in life is not limited to government organisations but has spread to professionals working in the private sector as well.

So, how feasible is the idea of early retirement? Can an urban professional save and invest in a manner that will enable him to retire in mid-40s without fretting over the next payment of his home loan installment? While searching for an answer, we at ET Intelligence Group worked on various scenarios of income, savings and return on investments. Read on.

SCENARIOS: Every working professional has his own reason for seeking an early retirement. For some it’s the boredom of modern office that pushes them to consider it, for others it’s the calling of their passion that becomes irresistible after a time. However, dreams can’t be realised if not backed by resources. So, for our analysis, we built three scenarios of income or salary. They are further divided in three savings and investment style that yields vastly different corpus at the end of the planning horizon (see the chart below). For simplicity let’s assume that a professional starts his career at the age of 25, and he wishes to retire at the age of 45 from job.

The person will have to draw a savings-cum-investment strategy with a 20-year planning horizon. Fresh out of university and living on a shoe-string budget, means lower savings. But as he progresses in life and realises the responsibilities that lie ahead and the desire to retire early, he progressively increases his savings. We have assumed that in the first 10 years of the career he saves 25% of his savings and raises it to 40% by the time he turns 35. Further, we also assume that in the first period the salary increment is 20% p.a., which declines to 15% p.a. in the second half of the working life. The assumption is based on the belief that in the first few years of career, professionals usually do job hopping to improve their earning but later they tend to settle down in a comfortable job.

Now let’s divide professionals in two sets. First: who earns less per month but has no big-ticket financial burden such as home, education and car loans to repay. Second: Those professionals who draw bigger salaries but are saddled with financial commitments in the form of monthly installments toward at least one major loan. Let’s assume that a professional in the first case starts his career at the age of 25 with a monthly salary of Rs 20,000 per month. The second professional, however, is luckier and draws a salary of Rs 40,000 in his first, but higher income in turns induces him to buy a house on loan which comes with an EMI for 20 years.

THE EXPLOITS: The summary of the results of the calculation is shown in the adjoining chart. If say Mr A starts his career with a monthly income of Rs 20,000 and his income and savings grow as assumed above, his corpus would grow to Rs 4.6 crore at the end of 20th year, i.e., when the person turns 45. The calculation is, however, based on the assumption that the person takes risk and invests in riskier but rewarding assets, such as, equity. In case he sticks to traditional investment avenues, which yield annualised returns of 8%, the corpus would be Rs 2.4 crore at the end of 20th year.

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