How much money do you need for retirement

(Last Updated On: July 20, 2017)
Have you ever given a thought as to how much money you require for your retirement?
How much savings will ensure you that you have enough money to outlast you.
If not this is what we are going to discuss in this weeks mailer.
Before we go into details there are few trends/observations which I want to discuss up front.
  1.  We live in a country where the state provided social security is almost zero.
  2.  Unlike our parents, most of us are doing jobs which will not have any structured retirement pension/benefits
  3. Our generation on an average arguably is going to live longest ever in human history so we are going to spend a lot more time without active income.
  4. Inflation can impact all of us in strange and some times crippling ways.
 So how much you need for retirement. The question essentially hinges on 3 basic factors.
  1. What is the lifestyle you want to maintain during retirement
  2. Estimate of how many years you want to plan to spend in retirement
  3. Our best case estimate on how inflation will pan out in all these years

Step by Step Process to understand how much you require for your retirement

  1. Understanding your current expenses/budget

    The first step to understand your retirement needs to understand your current expenses and budget. If you do not have a proper budget create one today.  Budget creation can be as simple as jotting down your key expenses in a spreadsheet and may be tagging it with basic expense heads like health/food/travel/entertainment/rent etc.

  2. Understanding what will be your key expenses during retirement

    From step 1 we know our key current expenses and expense heads in step 2 Add an additional column to your spreadsheet to specify if you would need this expense post retirement. Also, put up whether that expense will increase or decrease during your retirement. Think of any new expenses that might hit you during retirement typical example can be increased health expense, care taking expense, travel expense ( If you want to travel a lot post retirement)

  3. Projecting your Retirement expenses

    Now that we have an idea of our retirement expenses in today’s money lets project how much money we need to maintain the lifestyle we want ourselves to have. To do this we will need to make an additional assumption on how inflation will look in next few years. Below is a chart which maps historic inflation in India

If you see historically inflation has been between 7-10 % in India. Now you need to take a                   reasonable estimate of inflation for your calculations. I have done some calculations using 7 % inflation see the chart below.( Do note that sometimes the inflation which hits us is not truly captured in CPI inflation). With inflation number in place, next step is to punch in years to retirement.This is very simply calculated as your Retirement age – your current age . The formulae to use is simple compounding formulae

R= C *(1+i/100)^n

Where R= Retirement Expenses

C= Current expenses

i = Rate of inflation

n= Number of years to inflation

So let us say your current expenses are Rs 50,000. And you plan to retire in 30 years and would want to maintain your current lifestyle and expense profile. The rate of inflation is 7 % .

Your monthly expense at the time of retirement will be = 600000*( 1+0.07)^30 =4.56  lacs (approx)

4. Projecting your retirement corpus

Now that we know how much retirement expense you are going to have next step is to calculate the retirement corpus we need which can be put in a risk-free investment and will be sufficient to take care of your retirement needs. you can use a simple calculator like the one below to calculate corpus

Download the Retirement planning excel  now

So for the case above in order to maintain expenses of 4.56  lacs you would need a corpus of about 8.29 crores

5.  Calculating investments you need to make to achieve the desired corpus

Now that we know the corpus we would need for retirement, next step is to plan our investment/saving journey to reach that corpus. For this, you would need to assume a rate of return you can get in your investments. Based on that rate of return you would be able to calculate the monthly savings.

In general higher the rate of return lower is the monthly savings you will require. You can either use our excel above or use use bodhik SIP calculator to calculate your monthly savings you need to make.

If you have any questions please leave a comment below.


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1 Comment

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  • It depends on your expenses like what you have planned after your retirement. But I will want to suggest that normal saving can’t complete your dream after your retirement, for that you need to invest in Mutual fund SIP Schemes on the regular basis. SIP is the smarter way to create wealth investing over long time. So invest smartly and gain smart returns.

    Best SIP Schemes 1 year ago Reply

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