HOW TO RETIRE EARLY USING THE 555 RULE

It is wonderful to end up rich

Microsoft founder, Bill Gates, famously said, “If you are born poor, it is not your fault. However, it is entirely your fault if you die poor.” It could be seen as a statement of a famous man who made immense wealth in his life time. Alternatively, it is also a clarion call that you can actually end up rich, if you indulge yourself in a little bit of planning. We are talking about retirement planning, and the earlier you start the process, the better it is.

Understanding the 555 Rule for Retirement

Every person wants to retire rich, or have enough to last a lifetime. Today, having a sound retirement corpus is not about hitting the proverbial pot of gold or inheriting a fortune. You can actually invest money on a regular basis to achieve the goal of a comfortable life after retirement. All it needs is; discipline to start early and the persistence to stick to the plan.

What the 555 rule says is that if you start investing a small sum of 5,000 a month at the age of 25, then after 30 years, at the age of 55, you can end up with a corpus of 2.64 crore. We are not assuming great returns (just 12% per annum CAGR). Your first reaction would be to immediately use an online SIP calculator and verify this claim.

Incidentally, this SIP will end up with just 1.76 Crore and not 2.64 crore as promised. That brings us to the third 5 in the Retirement 555 formula, which is the 5% annual accretion in your SIP, or you can call it the 5% annual step-up. Now, Retirement 555 formula falls in place.

Retirement 555 formula actually works

Does the retirement 555 formula deliver the goods. Let us get back to the illustration of SIP of 5,000 at the age of 25, for 30 years up to the age of 55. We add a caveat that this will be a step-up SIP with 5% annual SIP accretion. Your income is going to increase over time, and you need to save out of such increases.

When you input the 5% Step-up, the target is actually achieved. At 12% CAGR returns, if you start saving 5,000 per month in an equity or index SIP and increase your contribution by 5% each year, then your ending corpus at the age of 55 would be 2,63,67,030 or 2.64 crore approximately. That is an amazing learning, as to how such a small contribution each month with small increases each year can make. In this case, the total investment over 30 years is 39.83 lakhs, while the balance 2.23 crore are the investment return generated over 30 years.

Can I retire earlier using Retirement 555 formula?

That is the million dollar question! Let say you want to retire at 50, instead of 55. Is it still possible to create a corpus of 2.64 crore? There are 3 ways to do it. Enhance the monthly SIP, enhance the annual accretion, or increase the returns through higher risk. Let us keep the 5% annual increase constant and change the other two. Here are 2 scenarios.

In Scenario 1, if you assume a higher CAGR return on the SIP, how much higher you need to go for the same corpus at the age of 50? If you want to achieve 2.64 crore at age of 50, you just have 25 years. Now, you must grow the money at 15.95% CAGR to reach 2.64 crore at the age of 50. That almost sounds impractical.

The other easier option would be to increase the starting SIP amount and then increase it by 5% each year up to the age of 50. How much should the starting SIP be; if we keep returns at 12% CAGR? You must now start with SIP of 9,700 per month and increase it by 5% each year. That means, you need to double your starting SIP.

If you want to retire early, enhancing return is not feasible and higher escalation may not be practical over the long term. However, you may then have to start off with a much higher staring SIP or mix higher SIP contribution with slightly higher return assumption!

Parting message: retirement planning is about time

The most important factor determining your retirement corpus is time; longer the better. It is best not to compromise on time. Let us look at it practically. If you start at the age of 25 with a starting SIP of 10,000 and increase by 5% each year, even at 12% CAGR returns, you end up with 5.27 crore at the age of 55. Interestingly, this corpus doubled in last 5 years, so that is the story you miss by cutting your investment time. The rule is to start retirement planning early and sustain it for around 30 years. That is when Retirement 555 really comes to fruition!