Viewpoint | Wish to retire at 50? Check your retirement readiness first

But retiring early isn’t easy.

Why? It's plain math

Let’s say you are 40 today. Now if like everyone else, you retire at 60 and (assume) die at 80, then you have 20 more years to save money for a retirement of 20 years. But if you plan to retire at 50, then you just have 10 more years to save money for a retired life of 30 years! Obviously, it won’t be easy.

So let’s discuss some points that people planning to retire at 50 should think about:

• Do you even know how much monthly income would you need in retirement? There is a related technical term for it too - Income Replacement Ratio, i.e. the percentage of your pre-retirement income that is required to maintain a chosen standard of living in retirement. Suppose you currently earn Rs 1 lac, then its possible that in retirement, you may just need 70% of it.

So your income replacement ratio is 70%. Once the income required to meet retirement expenses is known, only then you can estimate the required retirement corpus. But remember, everyone’s income replacement ratio will be different depending on their chosen lifestyles.

• If you are planning to retire at 50, remember that your retired life will be pretty long. For a soon-to-be-common life expectancy of 80 years, you need a corpus large enough to last 30 years. Do you have such savings or you are planning to retire with inadequate savings and take the risk of running out of money in later years?

• You will have to make assumptions about the returns that your retirement corpus would generate. Do not be over optimistic about it. Since the corpus will have some equity and some debt, assume that on the overall portfolio, you won’t get more than 2-3% above inflation if managed well.

• You might estimate a life expectancy of 80 and save accordingly. But what if ‘luckily’ you live longer? That’s a possibility. This (for lack of a better word) ‘risk’ or ‘longevity risk’ can somewhat be covered by purchasing annuities at an optimal time in/around retirement. This aspect should be kept in mind (especially for those who have a family history of super-old ancestors). Also be ready to cut down on expenses in later years if need be.

• What if your spouse survives longer than you? Will the corpus have enough buffer to take care of her expenses for a few more years?

• The retirement corpus discussed above takes care of your regular expenses. But what if you have large medical expenses? It’s possible that health insurance may not be enough to cover the full expenses. And if that happens, such large sudden hits can eat into your retirement savings very quickly.

• Talking of health-related expenses, it is not necessary that you only spend money on health if you are hospitalized. Many lifestyle diseases cost a lot even if managed from the home. So make sure that when you estimate your retirement income, you add some buffer for healthcare-related expenses as part of regular monthly expenses.

• At 50, you might still be pretty healthy. But when you retire at 50, you should make provision for a large-enough pool of money (in addition to the core retirement corpus) to take care of unexpected medical expenses (both one-time or recurring).

We have already discussed so many points about your real preparedness to retire at 50. And we haven’t even discussed the Sequence of Return Risk - something that even smart investors miss out on.

Think of it this way - suppose both you and a friend plan to retire at 50 with Rs 2 crore. In the 1st year, both your expenses will be Rs 6 lakh each.

Now the sequence of portfolio returns you get (while making withdrawals) could significantly impact how fast your retirement corpus depletes.

Suppose your portfolio sees returns of -10% in each of the first 2 years. On the other hand, your friend’s portfolio sees returns of +10% in each of those 2 years.

How will it impact the corpus utilization? Have a look:

Basically, what’s happening is that if you start withdrawing in a falling market, then your portfolio depletes quickly. But if you start withdrawing in rising market, the corpus continues to grow.

Problem is, you cannot pick and choose the market direction.

And this is why the ‘Sequence of Return’ (RISK) you get when you retire matters a lot.

Early retirees should assess the impact of a bad sequence of returns on their corpus. So some additional savings or ability to reduce expenses, is necessary to ensure the adequacy of retirement corpus for a sufficient number of years. Moving a major chunk of the corpus to safer assets at least a few years before retirement is also advisable and smart.

Also, understand that entering into early retirement with an insufficient corpus is foolish.

If need be, keep working for some more time to ensure that your retirement preparedness is 100%. If your savings aren’t enough but you have some physical assets (like property, gold, etc.), then consider monetizing them. Being asset-rich-cash-poor in retirement can be disastrous.

If you too are contemplating early retirement, understand that as glamorous as it sounds, it has to be planned well for with necessary precautions as discussed in the points above. Your best bet is to control your expenses (read about this formula to accelerate early retirement) and start saving early and a substantial part of your income.

(The author is the founder of StableInvestor.com.)