Retirement Planning: Can one retire at 40 with Rs 1 lakh monthly pension? Understand it through calculations

Retirement Planning: When we talk about early retirement, it doesn't mean that you will hang up your boots and spend the rest of your life at a beach home. Early retirement means achieving financial freedom early, reaching a stage where you don't have to toil hard to get money for your monthly expenses and other needs. One may achieve financial freedom at 35, 50, or 60 years of age, or not at all. It will depend on how you plan your retirement. Starting your planning early can have advantages.

You can experiment with a number of investment options, and if you invest in schemes that provide compound growth, you may generate a large retirement corpus in the long run.

But when you decide about early financial freedom, some questions arise, such as when should you start, what should be the monthly investment, what should be your retirement corpus target, and how many years will it take to create a fund? 

While starting retirement planning with your early pay cheques can be the ideal time.

The target corpus will depend on your monthly expenses in the future in an inflation-adjusted scenario.

Your monthly contribution will depend on your future corpus size and the monthly income from that.  

Can you generate a monthly pension of Rs 1 lakh by 40? 

Assume a few conditions before starting calculations for a monthly income of Rs 1 lakh at retirement.

Current age: 25
Retirement Age: 40
Monthly expense today: 30,000
Rate of inflation: 6%
Monthly expenses at retirement: nearly Rs 100,000
Monthly SIP today: Rs 20,000
Increase every year: 10
Annual return generated: 14 per cent
Inflation: 6%
Amount at retirement: Rs 2,04,20,395
If you do SWP of the entire corpus
Expected annual return on SWP investment: 7%
Monthly salary from this corpus: Rs 100,000
Monthly pension duration: 30 years
Lump sum amount after 30 years: Rs 9,82,29,193

In this calculation, you can see that if your current monthly expenses are Rs 30,000 at 25 years of age, 15 years down the line, at a rate of six per cent inflation, the same will be nearly Rs 100,000.

So, we will target a Rs 100,000 monthly pension. 

For that, you need to be a little aggressive in your retirement planning and start with a monthly SIP of Rs 20,000 and step up the amount every year by five per cent.

If you do that and get a 14 per cent annual return on your SIP investment, at 40 years of age, your invested amount in 15 years will be Rs 76,25,396, long-term capital gains will be Rs 1,27,94,999, and the total value of the corpus will be Rs 2,04,20,395.

Since you need to start a monthly pension at age 40, you can't take a risk with this money.

You may invest it in a hybrid mutual fund, where you expect at least a seven per cent return on your investments. 

If you get a seven per cent annual return on your SWP investments, you can draw a monthly salary of Rs 100,000 for 30 years, and after that, you will have an estimated Rs 9,82,29,193 amount in your fund.

(Disclaimer: These calculations are for knowledge purposes. Do your due diligence or consult an expert to plan your retirement.)