Recently I answered the question – How much money do I need to retire? for myself. The number that came out was whopping Rs. 9 crores (or $1.4 Million) if I wanted to retire at 45 which is my goal. Read about me here.
Given the fact that my existing portfolio is almost nothing, this seemed rather impossible for me to achieve. But then I picked myself up and started doing Early Retirement Planning for myself. And I am glad to say that if I maintain the discipline which is outlined in the sheet, I will reach pretty close to the target.
Download the sheet here –
So let’s jump straight to understanding the early retirement planning excel template and how to use it. Template contains 2 parts –
- Estimating Retirement Corpus required to maintain the same lifestyle
- Once the corpus is decided,then how to plan for it given your salary, existing portfolio and other incomes which you might generate in future.
Since I have already detailed out the first one here, let’s come directly to saving for retirement bit. Let’s have a look at the key points –
- Healthy Savings Rate – No matter how much you are earning, if you don’t have a habit of savings, you will never be able to retire. But then one would ask – How much is Healthy Savings Rate? Answer is anything north of 30% of the salary. Some crazy people save up-to 60% of their salary but let’s maintain sanity. So if you are not saving around 30%, do it NOW!. Here is how my proposed savings rate look like for next 11 years.
It looks difficult in the beginning but it isn’t. I will write a detailed post later on how to save for early retirement. Now coming back to the early retirement planning sheet, 2 numbers are important –
Annual Salary Increment and
Annual Savings Increment
I have taken annual salary increment to be 15% whereas annual savings increment to be 17%. Since I come from digital domain, 15% is sustainable (i hope so) which might not be the case in other industries. Therefore put a number which is the norm in your industry.
Note: I have put a higher number for annual savings increment as compared to annual salary increment. This is the main trick to achieve financial independence and retire early – to increase savings and not your monthly expenses.
- Investment of Savings: Once savings are done, next comes in investment of those savings.
If money is not put to hard work, it corrodes.
Therefore it becomes equally important to invest those savings in financial assets which meet your risk and return profile. Historically it is seen that for long duration of time (i.e. 8-10 years+ ), Equity does give good return. Since my retirement is still 11 years away, I have put my entire savings in equity. I trust Indian Stock Market to give 13% compounded yearly over next 11 years.
But you can divide your savings across different asset classes like Real Estate, Gold, Fixed Deposits, Public Provident Funds (PPF) etc. But hey do you know the best part about equity – Long Term Capital Gain Tax on Equity is ZERO at the moment therefore everything (at the time of redemption) is tax free. In a separate post, I will talk about framework to analyse mutual funds but let’s put that under the carpet for now.
You will be amazed to see how even small amount of investment grows over period of time. It is here where the 8th Wonder of the world comes in – Compounding. For example, Rs. 9,50,000 (Rs. 9.5 Lacs) invested today will swell to Rs. 41,17,797 (Rs. 41 Lacs) at the time of retirement (after 11 years growing at 13%). Here is the chart which shows how my original investments will grow –
- Existing Portfolio: My existing portfolio currently stands at Rs. 16.5 Lacs with the following distribution across different asset classes.
This is extremely inefficient distribution where Debt makes around 79% of the portfolio. This is absolute craziness to say the least. But I do plan to change this distribution to look something like this –
I plan to do it since return on FDs is very less. Besides returns are taxable therefore proving to be a drag on overall returns. By doing this change, I would be adding cool Rs. 16.8 Lacs towards my retirement corpus. See the maths in “Existing Portfolio and Return” sheet.
- Adding source/s of Passive Income: If you are among those who are able to meet your retirement corpus by just saving from the salary and existing portfolio, then good for you. But unfortunately for people like us, that’s not the case. And hence comes the need to add a source of passive income which can generate additional income required to bring me closer to the target.
I intend to do it through this blog. I am aiming to monetize this blog from next year onwards i.e. 2018. I chose online blogging since I come from digital domain. You can choose anything which you are good at and which can be monetized. I have kept earning targets from blog rather steep with annual earning increment of 25% and the earning for 2018 at Rs. 300,000 (Rs. 25,000/month). I know it is going to be hell of a task but I am up for the challenge.
Even with all these savings and planning, I will still fall short of my target by Rs. 50 Lacs. I am not planning for it and hoping that along the journey, I will cut corners on my expenses to save for the same.
Here is how contribution from different sources in retirement corpus (at 45 age) look like –
As is visible from the chart above, bulk of my contribution comes from the salary. But it requires financial discipline; financial discipline over next 11 years. Tough Isn’t it?
Planning for Early Retirement is one thing but walking the talk is another. Planning is done now the long boring execution is left. Let’s see how do i do.
Do let me know if you have any questions about the Early Retirement Planning Template and I would be glad to answer them.