Dreaming of retiring at 45? Do this maths before you quit your job

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Retiring early may sound appealing, but building a corpus that can sustain you for four decades or more requires careful planning. For a 34-year-old earning Rs 1.5 lakh a month, the challenge is to estimate future expenses, calculate the retirement corpus required and work backwards to determine how much needs to be invested every month.

In this Ask Wallet-wise, Sanjiv Bajaj, Joint Chairman and Managing Director of BajajCapital Ltd, explains how to assess whether retiring at 45 is realistic, the role of inflation and investment returns, and why healthcare costs and market risks must also be factored into the plan.

I am 34, earn around Rs 1.5 lakh a month, and I dream of retiring by 45. I’ve started investing, but I have no idea whether I’m on track or how big a corpus I would really need. How should I plan this properly?

Expert's Advice: Retiring at 45 is an ambitious goal, but the first step isn't choosing investments. It is understanding what your life at 45 is likely to cost. You have roughly eleven years to build the corpus, but that money may then need to support you for four decades or more. So an early-retirement plan has to solve two problems at the same time: building the corpus quickly and making sure it can last.

Take a simple illustration. Suppose your current monthly expenses are Rs 60,000. At an assumed 6 percent inflation, that could become roughly Rs 1.14 lakh a month by the time you are 45. If you then use a 3.5 percent annual withdrawal assumption, which builds in inflation-linked increases in withdrawals, over a 40-plus-year retirement the required corpus would be around Rs 3.9 crore.

Now comes the reality check. To build Rs 3.9 crore in eleven years, assuming a 10 percent annual return, you would need to invest roughly Rs 1.7 lakh every month. That is higher than the income mentioned in the question, so retiring fully at 45 with the same lifestyle would be difficult at the current numbers.

But that calculation is useful precisely because it shows you where the levers are.

You could extend the retirement age. Even moving the target to 50 can materially change the monthly investment requirement; in this illustration, it comes down to roughly Rs 1.15 lakh a month. You could also reduce your expected retirement expenses, increase investments as your income rises, or consider a phased-retirement approach where you continue with some part-time or consulting income after 45.

Healthcare deserves particular attention in an early-retirement plan. Employer health cover generally ends when employment ends, so you need to account for your own health insurance and potentially higher medical costs over a much longer retirement period.

There is another risk that early retirees sometimes underestimate: the sequence of returns. If markets have a weak phase soon after retirement, withdrawing from a falling portfolio can put additional pressure on the corpus. Keeping a few years of expenses in relatively stable assets can provide some breathing room. So I would begin with three things: track your actual expenses for three months, list your existing investments and calculate the gap between where you are and where you want to be.

The important thing is not to fall in love with the age 45 number. Treat it as a planning target and review it every year. A good retirement plan should evolve as your income, expenses and priorities change. The figures above are illustrative assumptions and are not a guarantee of returns. Investments are subject to market risks.