Retirement Savings: How Much Money Do You Need to Retire?

Introduction to Retirement Corpus Planning

Retirement is supposed to be the stress-free, enjoyment-oriented period of your life. You can, however, only enjoy a happy retirement if you are financially secure. An adequate retirement corpus is imperative to fulfil retirement dreams of travelling, taking up a hobby, relaxing with family, leaving a legacy for your children, and more. But how can you know how much you need for a financially secure retired life?

Factors to Consider When Calculating Your Retirement Corpus

1. Know your retirement time horizon: The first step in calculating how much retirement corpus you need is to know how long you have until retirement. The official retirement age in India is 60 years. Nevertheless, you are not obligated to work until that age. You can choose to retire early. But early retirement means you will need more funds for longer post-retirement life, and the accumulation phase for your retirement corpus will be shorter. You will need to collect more money in a short period. Therefore, it is best to begin your retirement planning journey as early as possible, ideally in your 20s.

2. Accommodate inflation: Saving for retirement is a long process, and inflation has a key role in its success. As you near your retirement, your expenses will grow and hence, your savings should ideally align to meet these high demands. Experts suggest considering a 6% inflation rate for retirement planners.

Additional Read: 5 Ways to Build a Substantial Retirement Corpus

3. Calculate your monthly expenses: The second step estimates how much monthly expenses you will incur after retirement. This can be accomplished by linking the expenses to your current lifestyle and factoring in the inflation rate over the years. Take your present expenses and deduct any loans repayments or investments. However, be mindful that specific expenses like healthcare, insurance premiums, and emergency expenses tend to rise as you grow older. As an example, if your current monthly expenses are Rs. 40,000 and you have nearly 30 years to retire, your monthly expenses at retirement (based on 6% inflation) will be Rs. 2,29,740 (40,000(1+6%)^30).

4. Expected return from retirement savings: During the accumulation phase, you are young, can take high risks and make high-risk investments like stocks. You have time to absorb and overcome losses until retirement. You can invest in stocks, alternative assets, real estate investment trusts (REITs), gold, silver, and other commodities during this period. However, your investment approach will be more conservative than aggressive during retirement. You would prefer low-risk, low-return investment options like Senior Citizens' Savings Scheme (SCSS), National Pension Scheme (NPS), mutual funds, fixed deposits, Monthly Income Schemes (MIS) of banks, etc. Hence, your investment return will likely be between 6-7% annually.

5. Inflation post-retirement: Your retirement corpus accumulation phase is expected to last for five decades or more. In this period, the inflation rate will likely subside. You can consider a lower inflation rate of nearly 5% for your post-retirement phase, provided your retirement is more than two decades away.

6. Calculate your retirement corpus: Once you know all the factors above, estimating your retirement corpus is quick. 

Retirement corpus = Annual retirement expenses *((1-((1+post-retirement inflation)/(1+post-retirement rate of return)^life expectancy after retirement)/(post-retirement rate of return- post-retirement inflation)).

= 27,56,876 *((1-(1+5%)/ (1+7%) ^25)/ (7%-5%)) = Rs. 5,18,38,484.

Given this example, if your expected monthly expenses during retirement are Rs. 40,000 with a 5% post-retirement inflation rate, 6% accumulation inflation rate, and 7% post-retirement return. You may need a retirement corpus as large as Rs. 5.18 crore, given you are at least 30 years old away from retirement and your life expectancy post-retirement is 25 years. However, this is not an absolute number, and the exact figure can alter given the change in variables.

Additional Read: What is Retirement Mutual Fund and how to calculate it

Conclusion

Understanding how much money you will need for a comfortable retirement is important to ensure you can save and invest smartly in the present to fulfil your retirement expectations. You can also use an effective online retirement calculator to know your retirement nest egg requirements. 

Start your retirement planning journey now.