Retiring at 45? Withdrawing ₹1.5 lakh a month from a ₹5 crore corpus may not last till 85. Here's why

For early retirees, the retirement corpus should not only be big in size. It should also able to outlast inflation, market cycles, rising healthcare costs and retirement years that may be longer than the working years for an early retiree.

For individuals planning to retire early at 45, a ₹5 crore corpus may seem like a psychological finish line. But calculation shows it may fall short before age 85.

To test whether a ₹5 crore will hold up from age 45 to 85, let's assume a retiree who stops working at 45 and needs the corpus to fund expenses every year until 85. His withdrawal rises each year with inflation to maintain the same standard of living, while the remaining corpus continues to be invested and earn returns.

• Retirement corpus at age 45: ₹5,00,00,000

• Current monthly expense: ₹1,50,000 (₹18 lakh/year)

• Inflation: 7% per year

• Post-retirement return: 9% per year from an equity-debt portfolio.

• Withdrawals made annually, corpus invested throughout

Here, the annual real rate of return or what the corpus earns after accounting for inflation works out to be roughly 1.87% as below:

Real rate= {(1+nominal return)/(1+inflation)} -1 = {(1+0.09)/(1+0.07)}-1 = (1.09/1.07) - 1 = 1.01869-1 = 0.01869 or 1.87%

This real rate keeps the corpus alive for nearly four decades. However, calculation shows that corpus will be exhausted in around 39 years, around age 84, if one withdraws ₹18 lakh/year under the above assumptions.

Real-world risks

Retirement based on mere assumptions can lead to worse outcomes. There are several real-world factors that can playout during retirement to push actual outcomes below an Excel projection. The following are some of them:

• Sequence-of-returns risk. Real markets may not always deliver assumed returns. A sharp downturn in the first five to 10 years of retirement can permanently dent the corpus's ability to recover.

• Healthcare cost inflation: While general inflation in India has averaged around 5-7% in recent years, medical inflation has grown in the 10-14% range. For a 45-year-old retiree, the healthcare spending as a share of total expenses may rise sharply after 60.

• No employer safety net: For someone retiring at 45, decades of employer-linked health insurance, EPF contributions and gratuity accrual are no longer available.

• Taxation on withdrawals: Redeeming equity and debt mutual funds triggers capital gains tax. Over a 40-year withdrawal period, this tax drag will reduce the effective corpus available to spend.

• Underestimated longevity: Life expectancy for someone who is already 45 and in reasonably good health is likely to be higher than national average. Therefore, planning only till 85 years may itself be conservative for some retirees.

• Lifestyle creep: Retirement doesn't mean a freeze on household's running spends. Travel, children's education and family obligations may push actual expenses above what was budgeted at the point of retirement.