Retirement Planning for YOUNG IT Employee in 3 Years – A True incident

This is an amazing fire retirement planning story of a young IT employee, a true case study where the person can achieve fire retirement in a span of 3 years. A real incident of time, compounding and early investment.

IT employees have an advantage over other industries as some of them get a chance of going offshore in early part of their career. Trust me, those 2-3 years, when you are young and have this opportunity of investing some extra amount, can make a big difference in your life. Big difference in financial life, only if you know the right instruments to invest.

Most of the IT companies already have big insurance agents in their compound who push the young investors to invest in the insurance policies instead of guiding them the right way of financial freedom. And why won’t they? They themselves are on a way of being financially free by earning big fat commissions on the insurance policies.

Coming back to the case study, I received a call from a youngster who is working in an IT company in Bangalore. The guy was hardly 26 years and wanted to go for financial planning. You know, when you get client like this, you feel really happy. A youngster aged 26 years, going for financial planning definitely mean that Indian youngsters are changing, they are more conscious about their money, financial freedom. Let us name him Suresh.

After explaining the process of financial planning, Suresh told me that he is not planning to get married for at least another 3-4 years. At this point of time, I only want to plan about retirement planning. After discussion, I sent him the data sheet to collect his personal, employment and financial details.

Retirement Planning

Here are the details

Current Age – 26 Years

Retirement Age – 60 Years

Monthly retirement expenses in current cost- Rs. 30,000. He wanted to settle down in his native village after retirement.

Suresh had no investments other than around 5 Lakhs in different FDs which he had kept for an emergency fund. There was hardly any amount in his PF account as the monthly deduction towards PF was 1800.

One thing, he did not mention in the data sheet was the monthly surplus amount to invest. When I asked the question about surplus amount, he told me to let him know the investment amount required as he would be able to invest the required amount.

I gave him the calculations like this

Value of 30,000 after 34 years at the time of retirement @ age 60 would be around 2.2 Lakhs per month assuming an inflation rate of 6%.

The corpus required to maintain this inflation adjusted expenses of 2.2 Lakhs per month would be around 5.90 Crores (Assuming life expectancy of 85 years and return over inflation as 1% after retirement)

Invest 1.5 Lakhs per year (or 12,500 per month) in PPF account to create around 156 Lakhs in 34 years. Also start SIP of 14,000 in equity mutual funds to create around 434 Lakhs at age 60. This will help you to create 5.90 Crores in a span of 34 years. So the monthly investment required till age 60 is 26,500.

Now if you ask, what is extra ordinary in this plan – this is normal retirement planning.

Also Read: Asset Allocation by Age, Returns or CRATON

I am 26. Can I retire in next 3 years?

Here comes the twist. Suresh told me that he is going to USA on a company assignment and would be there for 3 years and he wants to invest the surplus amount in such a way that he need not have to worry about retirement planning after coming back from USA.

The chat continued further- he told me that, he would be working till age 60 in India and can manage other goals & expenses from his Indian salary. He just wants to know the amount to be invested in 3 years which will grow up to 5.90 crores by the time he turns 60.

What do you think, is it possible, let us check. First, I asked him to open a PPF account before moving abroad because once you become NRI, it not possible to open a PPF account.

Now comes the investment part, Suresh wants to invest for 3 years only. So, whatever, he invests in 3 years will have 31 more years to grow.

Now let us check the present value of 5.90 Crores for 31 years assuming a return of 9% (assuming an equity/debt ratio of 70:30). The present value after 3 years would be 41 Lakhs. That means if Suresh can create 41 Lakhs in 3 years, this will grow to 5.90 crores at age 60.

How much is required to create 41 Lakhs in a span of 3 years assuming a return of 9%?

1 Lakh per month for 3 years and you will not have to worry about your retirement.

Bang on. Suresh is able to invest that much amount as he is expecting a monthly surplus of INR 1.3 Lakhs during the US assignment.

Final Thoughts

In the beginning of the article, I had written that IT employees have an advantage. At their early part of career, they can invest much more amount than their peers.

But, this also applies to other youngsters who are doing well in their career. Investing at an early stage of life has the power of compounding which can do wonders to your financial life.

So, if you are a youngster reading this article, start investing. Start investing in the right product.