Retiring to India at 37

I found an interesting post recently on the Early Retirement forum by an Indian immigrant who is considering retiring in India at age 37. The poster asked several interesting questions, so I thought I would reproduce the post here (edited for clarity), and attempt to answer some of his questions.

I am a 37 year old immigrant and naturalized US citizen. I am married, and have a 2-year old child. We have about $600,000 saved for retirement, with two-thirds of it in taxable accounts (tax-efficient index funds and low turnover funds), with roughly 75% equities and the rest in bonds/cash. About 34% of my investment portfolio is international. In addition, we have about $100K for our child’s college education, all in index stock funds, 65% US, 35% international. We hope to retire to India by end of this year. We don’t own a home anywhere in the world. However, we have investment real estate in India, which serves as a hedge against our purchase cost of a future home there.
My first reaction was that $600K sounded too low to be able to retire at the relatively young age of 37. But the poster provides more details about his plans.
1. Are my retirement assets sufficient to support $2000/month in India, which should give us a comfortable, but certainly not luxurious, lifestyle once the home is fully paid for? I am worried that if the inflation rate in India is higher than in the US I may be forced to withdraw more from my asset base, especially in later years when gainful employment becomes difficult.
Clearly, he is planning to withdraw 4% a year from the $600K portfolio, which yields the projected $2K/month income in India. I assume that he is not just expecting to earn a 4% yield on the account, and then hoping to live on the generated income. As I illustrated in an earlier post on Living on interest payments in retirement, this strategy won't work, since even a modest increase in inflation can wipe out much of the purchasing power of his interest/dividend income.

Instead, I assume that he plans to start with a 4% withdrawal rate, and then adjust it upward in future years depending on the inflation rate. This is a sound plan, but even the "safe withdrawal rate" of 4% is intended for those who retire at a normal retirement age, such as 65. Someone retiring at 37 has to be prepared for 60 or more years of retirement, and a 4% withdrawal rate could exhaust his portfolio sooner than planned.

I used FIRECalc to do a quick estimate of how much he can expect to withdraw per year if he expects the money to last 60 years, with a 75/25 stocks/bonds split and a 0.5% expense ratio. According to FIRECalc, he can withdraw 3.43% initially ($1713/month) for a 95% chance of not running out of money. For a near-100% chance of not running out of money, he can only withdraw 3.18% initially ($1591/month).

Conservatively then, assuming no other sources of income, he should withdraw no more than 3% of his portfolio ($1500/month) in the first year of retirement. Now, even $1500/month could buy a decent lifestyle for a retired couple in many places in India, but since he is planning to retire with a young child, his projected expenses could exceed this.

2. What percentage of my retirement assets should I keep in Indian rupees from next year?
This is a very interesting question. A US citizen retiring to India will need to have a 3-part asset allocation: US, India, and International, where international means non-India, non-US assets. The normal rule of thumb is that one should keep most of one's assets in the currency that one intends to spend in. However, as a US citizen (and presumably parent of a US citizen), he is likely to have close ties to the US, and much of his income may come from assets held in US dollars. The differing rates of inflation in the US and India, and the fluctuations of the currency exchange rate make this a hard problem to tackle.

I suggest that he keep at least 10 years worth of expenses in Indian currency to protect him from a further devaluation of the US dollar. This should be kept in fairly liquid investments, so as to protect him from a downturn in the Indian equity or real-estate markets. For subsequent years, he could use a managed payout fund, or a "buckets of money" approach to generate a relatively stable income as I mentioned in an earlier post on generating income in early retirement. He can be more aggressive with money in his long-term investments, especially in the tax-deferred accounts in the US, since he won't be able to access these till he is 59 1/2 years old.

3. Should I include Social Security in the above calculation? My wife and I both are vested at the minimum (40 quarters), and projections indicate that even if we don’t contribute a penny from 2009 into SSA, our monthly benefits at age 62 are $600 for me and $500 for my wife (present dollars) . Given that this represents a sizable chunk of my retirement expenses, I am eager to know if I can count on SS coming through in my later years. My wife and I are 25+ years away for early eligibility at 62.
Although the rules for social security payouts are likely to change in the future, I expect that the benefits they have already earned are not likely to be affected. However, the value of a $600 social security payout to someone living in India 25 years from now is very hard to estimate, due to the potential changes in cost-of-living in the two countries, and the currency exchange rate, both of which are near-impossible to predict for such a long time frame.

To be on the safe side, I would not count on any social security payments in their plan. Any payments that they receive should really be considered a bonus. Also, it is possible that there could be changes in the future that affect how social security payments are calculated for overseas retirees. For example, in the British state pension system, retirees living in many non-EU countries do not receive cost-of-living adjustments in their pension payments. Since Americans living overseas do not constitute a politically powerful lobby, it is not inconceivable for them to get the short end of the stick when social security reform finally happens.

4. Have we saved enough for college education for our child? Not knowing what our child will do when he grows up, we would like these funds to cover either his 4-year undergrad education in U.S. or 2-year U.S. graduate education, assuming he does undergrad in a low cost but decent school in India, which we can cover within our monthly expense budget.
I will restrict myself to the undergraduate education here, because I believe that parents shouldn't be expected to contribute to graduate school for their children. The rapid year-to-year increases in college costs are finally starting to level off, so I expect that $100K saved in today's dollars would be sufficient to cover a 4-year degree, including room and board, at a public college 16 years from now.

In their case, one problem may be that since they will not be residents of any US state when their child enters college, their child will not qualify for in-state tuition rates. Out-of-state tuition is much higher in many public colleges, and tuition at many private colleges can easily exceed the amount that they have allocated. I would not worry about this too much, since they seem to have saved far more than most parents in their situation.

5. Health care is inexpensive in India so we are less concerned about it, but we have earmarked a modest $10K for it so we don’t dip into the retirement asset base. This will be invested along with my retirement funds for future growth. We intend to purchase health insurance in India for major illnesses, which is covered within my $2K monthly budget.

$10K for total health care expenses for a family of 3 sounds very low, even in India. I am not familiar with how private health insurance in India works. Even if the premiums are affordable, I wonder what the deductibles and expense limits are. Will the insurance allow them to choose the best hospitals and clinics in case they need specialty care? From what I hear, while health care expenses in India are cheap compared to the west, they are increasing at a high rate, especially at premium institutions where you can expect personalized care.

If anyone has information about actual health insurance premiums and expense limits in India, please leave a comment.


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16 comments:

Anonymous said...

I was in the US for 7 years and came back to India and work here for a local company. I am married and have a 6 years old.
We live in Andheri, Lokhandwala in 2BHK (purchased out rite) and have a Santro (purchased out rite) car. Our family expense per month, including school fees, etc does not exceed more than 30,000 / 40,000 INR. That includes eating out once a week in decent hotel, watch movie at home on DVD once a week. We sometimes take out of station trips once/twice a year, which costs around 2,00,000 total including air fare, etc. Insurance premium is about 15,000 p.a. for 5,00,000 coverage for the family.

Inflation is now almost close to 12%, and is expected to cool down only next year to 6% or so. Stock market for retiree should be a complete no-no, I have learned this lesson hard way. Better keep money in fixed deposits in bank, I know this is a wrong thinking, but atleast you don't loose your hard earned money when you have no other source of income.
Interest rate in banks in India for a years deposit is about 9% and is expected to go up.

Hope this helps.

Nigel said...

Anon,
Thanks for the comment, for the details. I would like to know a bit more about the medical insurance plan you have. You mention that "Insurance premium is about 15,000 p.a. for 5,00,000 coverage for the family.".
- The INR 5,00,000 coverage is for one year, right?
- Are there any deductibles? In other words, if you incur an expense of INR 10,000, does the insurance pay all of it, or do you have to pay some of it yourself?
- Can you choose the doctor and hospital yourself, or are there any restrictions?
- Is the premium adjusted yearly? Any idea what it may be for older (age 50-65) folks?
- Which insurance company/plan do you use? Is it available to retirees (those who don't work)?
Thanks

mstar said...

Firstly, thanks for this very informative site / forum. I was struggling to get certain imp info elsewhere for quite some time; now glad to find it here. Secondly: about, Health Insurance in India, ICICI Lombard is one of the best. Presently annual insurance premium for a 3 lakhs cover (Rs), is about Rs 11,000.
http://www.icicilombard.com/app/ilom-en/default.aspx
On this site, one can check out 'Family Floater' or 'Health Advantage'.

G nagarajan said...

friends kindly understand there are so many banks that offers medical insurance with a new S b a/c which is fairly reasonable than all these Insurance ( both Public/ private) charges a premium.
take a look at it.
i am one of the beneficiaries .

Anonymous said...

This is for the guy retiring at 37, firstly congrats at least someone thinks like that, anyway the solution to your situation is that only two asset classes can beat inflation one equity and the other real estate.You have close to 2.25 cr INR, historically any good mutual fund has given return close to 20%.If you withdraw 10% annually which is close to 1.75 lac per month enough to run your house in india and the balance 10% is ploughed back in the principal so it will take care of the inflation.The other solution is to to keep close to 50 lacs with you which will keep you afloat for 4-5 yrs and invest the balance in real estate in the up coming suburbs buy small properties in many projects, enjoy the rent and appreciation for few yrs then sell as per need, if done intelligently the rent will take care of your expenses as rent is also inflation adjusted and increases manifolds in yrs to come.lastly remember you can retire with any amt its the attitude which matters and the financial deficiency is in the mind and not in the amt.

Shanksbala said...

A good discussion forum. I am also a like minded individual, looking to retire by 50 (37 is too young to even think of retiring, leave alone the uncertainities). Couple of observations.

1. Medical Insurance - I beleieve beyond 50 or 60, this is the major expense component one has to budget for. Healthcare costs in India are sky-rocketing and will reach unimaginable highs if something is not done to curb it. Someone retiring in 2020 should plan atleast INR 300,000 hospitalization coverage per year per individual. Please bear in mind that no insurance companies offer family floater policies beyond 60.

2. Children Education expenses - This is also something that is sky rocketing YoY. What it cost INR 50K for my engineering in 1991 costs about INR 600,000 to INR 700,000 today. That is a 10 times increase in 20 years. So retiring by 37 is just out of question especially when you have a 2 year old baby.

It is not safe to depend only on fixed deposits or equity dividends to manage your living post retirement as fixed deposits never beat inflation and equities has the power to wipe out your net worth in a day (given the fact that our stock market is completely operator driven).

best wy to retire is to have a combination of fixed deposits, mutual funds and 50% of net worth as house so that you can live off on the rent.

Anonymous said...

For retirees, Safety of money is important - In stock market, no one can assure that entry is correctly priced nor does one assure you the exit timing. CDs - Money in will come out for sure at the end of CD term.

To address inflation - Take 50% of interest received after taxes and reinvest in another CD. Effectively, the interest component reduces to 3% utilization of investment amount towards expenses, 3% goes to taxes and 3% to principal. If you calculate 10 years from today, the amount would have increased to some extent to compensate for inflation. If you have a house that is fully paid for, then for sure on a 2.25 crore principal, the interest of 6.75 lakhs will provide sufficient living expense for today and 10 years down the line, the principal would have grown to 3 crores giving 9 lakhs as interest.

Ashok Bangera said...

I am 55 year old , my present annual income is 33 lacs per annuam net deducting tax , I have my own house , children are grown up and settled .I have a cash of 2 crore and another 5 year service left.How much money I need after the retirement, exp includes food , car exp, entertainment , foreign trips

Rahul said...

I am now 50,,, took retirement at age of 47, kids in collage. did some calculations but not sure about inflation figure to be consider. lets see how it goes..

buddy said...

Hi,
Am 38yrs with a family of 2 kids(daughter 4yrs and son 3yrs ).I want to retire by next year. My current assets are
an fd of 2.3cr for children education. 3 apartments generating a rent of 70k. equities for 50 lacs. cash in bank around 25 lacs.
Can i live my next 46 years with this income

Anonymous said...

Retirement always doesn't depend on how much you have but it depend how much you spend. General rule is that if you have more than 30 times of your average annual expenditure, you can say good bye to your daily job and start living your life comfortably. Early retirement also doesn't mean that you will close the doors for any other sources of income.

Anonymous said...

where to retire in India?

Iftekhar Khan said...

GOA

Anonymous said...

I usually think sometimes about the same question of retirement in the same age where you all are like 35-40 years. But on the same time I also think about “what I am going to do after getting retire” being human we should be occupied somewhere!!!!!!!!!! And after reading all your comments I realize I am not prepare for it because you guys have estimated it beyond my estimate and that was around 1crore is enough to live a decent life with wife along with two child having own home .

Anonymous said...

Thirty times your annual expenses is required for safe retirement.Make investments such that it beats Inflation.I wont recomend Equities during retirement because Indian Stock market is uncertain. Last 5 years return in Stock gives 7% return and for 9 years it is 9.50% and I personally feel it is not worth spending your time in monitoring stocks which yilds such low returns.FD is far better than this.
If you have excess to 30 times of your Annual expense then you can take risk by investing in good rated Mutual funds.

joe said...

i'm 35 and single with no children. have got 200 thousand dollars and should have around 1500 $ per month hopefully long term or at least for 2 years from the date i'd retire. How does that look?