Hatching your nest egg early

Early retirement is an option for some, provided they have clarity on their plans after the big step

Mr S and his wife L approached us with a retirement query. He was seeking early retirement, at around 52 years of age.

S has been working in a corporate firm for more than 20 years and has accumulated assets for the long term. He also recently inherited his parent’s property. His net worth as quoted by him was as follows.

Financial assets

1) Cash in hand: ₹7 lakh 2) EPF: ₹48 lakh 3) Fixed deposits: ₹3 lakh 4) Unit-Linked Insurance Policies (ULIPs): ₹26 lakh (current value) Total financial assets: ₹84 lakh

Fixed Assets

1) Self-occupied independent house in Chennai: ₹3 crore 2) Inherited rental property in Chennai - 1: ₹2 crore 3) Inherited rental property in Chennai - 2: ₹1.5 crore 4) Personal assets such as jewels: ₹40 lakh 5) Land near Chennai: ₹60 lakh 6) Rental property in Chennai - 3: ₹60 lakh 7) Rental property in Chennai – 4: ₹50 lakh 8) Rental property in Visakhapatnam - 5: ₹40 lakh Total fixed assets: ₹9 crore. As he did not have any liabilities, his net worth was ₹9.84 crore.

S was getting a total of ₹10 lakh as rental income from the five properties. His only son is in his final year PG course, for which S had already paid all the fees. His son will start working with an MNC in a few months.

Though S said his expenses are around ₹70,000 per month, we analysed it independently. We found his actual expenses included petrol and maintenance for his personal vehicle, which is reimbursed by his company.

After providing for retirement-related expenses, his expenses were found to be ₹92,000 per month.

In addition, he wanted to have a travel plan every year at a cost of ₹3 lakh till he turned 70. S wanted to spend around ₹20 lakh on his son’s wedding that was due, likely, in the next 4-5 years. His car was almost seven years old and he wanted to buy a new one for ₹15 lakh.

To get ₹92 lakh per month from his age of 52 till his expected life expectancy of 90, S needed ₹3.55 crore. We assumed inflation of 7 per cent and expected return of 8 per cent.

There could be challenges with higher inflation and lower rate of return in the long run, but, on an average, S would be able to generate 8 per cent post-tax return with a maximum of 20 per cent equity allocation.

Vacation expenses

In addition, he needed to have ₹50 lakh towards his post-retirement vacation. This corpus can fund ₹3 lakh worth vacations every year with an expected return of 8 per cent and inflation of 7 per cent for 18 years. His second rental property currently fetches a yearly income of around ₹3 lakh, which could be used towards vacation expenses.

Rental income from the other properties were mapped to property management expenses every year.

We assessed his risk profile to be moderately conservative. He had no prior experience of investing in equity other than his participation through ULIPs.

Realty-heavy

We had to explain to him the challenges he faced, with his assets skewed towards real estate and the dependency of his retirement only on rental income. Rental income depends on the continuity of good tenants and associated costs with property maintenance issues. We also explained the advantage of getting a fixed income through other sources without depending on individuals (such as tenants).

After multiple discussions, he agreed to sell his Visakhapatnam property as he had been unable to find suitable tenants for the past 4-5 years.

He also disposed of and near Chennai during the course of the planning exercise. These together would fetch him around ₹1 crore, which along with his PF accumulation, had to be invested in financial assets. By doing this, S was in a position to get a monthly income of ₹75,000 after providing for taxes.

We assumed ₹1.5 crore as the total corpus and a risk-free post-tax return rate of 6 per cent pa in the long run. This, coupled with the rental income from one of his properties in Chennai (₹4 lakh pa), would be enough for S to manage his retirement expenses.

Rental yields from other properties need to be judiciously deployed to manage the properties, his health fund and other retirement-related needs. The amount available in his ULIP could be used to buy the car and cover his son’s wedding expenses. S was advised to acquire financial assets to fund his post-retirement vacation goal.

Not having adequate health cover for himself and his family was a risk that we had identified. We advised S to have a combination of health insurance products for a total sum insured of ₹20 lakh, considering his social status and health conditions. As he has adequate assets, we advised him not to opt for life cover at this age.

We advised S not to immediately retire from his corporate employment as he did not have any idea about his activities post-retirement.

Increased expenses

In our experience of working with early retirees, we have observed that expenses keep rising in the first few months after retiring. When an individual does not have clarity on his/her routines post-retirement, increased expenses become a major risk which eventually becomes a long-term issue.

Hence, we advised him to opt for retirement after aligning himself with suitable activities. He should also start working on such activities a year or two before setting foot into retirement to be better prepared mentally. This will safeguard his wealth as well as health. This time will also help him consolidate his real estate assets and convert a portion of the same to financial assets which can help fund his consumption needs.

The writer is an investment advisor registered with SEBI

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