One of the first few steps of healthy financial planning is to gauge how much money you need to retire. If you have followed goal based investing strategy, you must have already asked yourself this question, if not, it is never too late to ask it again.
The answer lies in a host of factors but before we quantitatively check how much money you need in India for retirement planning, lets first begin by asking ourselves why we need to save for retirement in the first place.
How much money you need to retire in India ?
It is a no brainer that at some point in our life we are going to hang up our boots and stop working. And that probably is going to happen a little late in life, for most people, by 60.
That is the age where suddenly you will stop bringing home your salary but your expenses will continue. The key word here is expenses. You need money at retirement to take care of your monthly expenses. If you stop earning when you retire, obviously you will need to have a large corpus to take care of your monthly expenses and for that you will need to begin saving money now.
Let us jump into understanding and calculating how much you, the reader, need to save on a monthly basis for your retirement. We need to have the following data for this exercise.
- Your current yearly expenses
- Your current age and retirement age
- Current inflation rate
- Rate of return on investment as of today
- Rate of return on investment after you retire
Scenario : Assume you are 35 years of age today and will retire at 60. Let us also assume that your current yearly expenses are Rs 240,000/-. Let us assume inflation to be 8%, rate of return in investments made today till retirement to be 15% and rate of return on investments expected after retirement to be 6%.
How much money you need to retire – Step 1
One needs to project his currently monthly expenses to the year when he will retire to find out the monthly expense that will be required at that point in time to live as richly as one is doing today. This is because of a monster called inflation. Inflation increases the cost of basic items you consume so your expense today will not be the same tomorrow. It will be more.
So in our example above, we need to project a yearly expense of Rs 2,40,000/- at a inflation rate of 8% till the retirement year, which is (60-35) = 25 years away.
Jump over to the Inflation Planner Calculator and input your values as following :
- Current Expense = Rs 2,40,000/-
- Duration = 25
- Interest rate = 8%
Your answer should be Rs 16,43,634/-.
What this means is that after 25 years, your current annual expenses of Rs 2,40,000/- will balloon to Rs 16,43,634 per year !!! That is what inflation does to your expenses.
At the end of this step, you have the annual expense figure for your retirement.
Step 2
Now if you need that kind of money each year, then you need to put aside a corpus into an instrument which will give this money year on year. We assumed earlier that our return after retirement is a meager 6%. So, if we need Rs 16,43,634/- in a year from some corpus at 6% rate of return, then that corpus will be : 16,43,634/-/6% = Rs 27,393,900/-. That’s basic maths.
What this means is that at retirement, the corpus you need to meet your yearly expenses year on year is Rs 27,393,900/- !!!
Step 3
Now we know the corpus we need when we retire, we know we have 25 years to save for it and we also assumed that we can fetch 15% returns on our investments. Let us find out how much we need to save each month beginning now to accumulate this corpus.
Jump over to the Monthly SIP Calculator and input your values as following :
- Final Corpus Required = Rs 27,393,900/-
- Duration (in months) =25*12
- Rate of return per annum (%) = 15%
Your answer should be Rs 8,445/-.
What this means is that if you keep aside Rs 8,445/- each month for the next 25 years and if the investments grow at 15% rate of interest, you will be able to meet your retirement corpus.
Last Word
That was easy ! Go ahead and input your values and check for how much money you need to retire.
It must be noted that this is a simple method or a do it yourself way by which you can check for yourself how much you need to save for retirement. This calculator does not take into consideration till when you will live or even the impact of inflation in the post retirement period. That is a more advanced methodology.
There are more easy do it yourself methods for retirement planning and we shall explore them, along with the advanced methods, in future posts.
For now, start saving for your retirement. It is one of the most important things to do in your lifetime.
Very good calculators.
Nice inormation though. what did you mean when you say you have not taken inflation into account after retirement ? I did not follow that.
@Dilip, After you retire, you will put away your money into a safe instrument which will probably earn you say 6%. At the same time, inflation will effect your earnings and this 6% will obviously be lesser. What I meant to say in my article above is that this calculator does not take into effect that impact of inflation after retirement.
Nice article. However – ignoring the inflation part would obviously impact the final sum in a big way – as it is bigger than the returns. And just mentioning 6% should be after tax.
@Ashish, I agree. I intend to do a future article on making this wider and better. For beginners, this could help as a starting point.
Hi,
I feel a monthly SIP plan investing in equities will inculcate discipline and can help you manage all the volatilities & uncertainty and make you post a big corpus for your retirement. Inflation erodes the value of money. So, i feel for a layman SIP is the best instrument as it compounds your money multiple times. As one famous person said ” Power of compounding is the eight wonder of the world”.
@Sujay, It indeed is. SIP works best for investors.
Hi Radhey, the inflation planner calculator is not working for me. When I press calculate it does not return any results. Can you please check?
@Vivek K, I will correct, not sure what got screwed up.
@Vivek K, I fixed them now. Sorry about this.
Hi, I m a regular visitor of this site and it has helped me in understanding basic investment concepts.
I earn 53k per month. Invest in 2K/month- SIP HDFC Tax Saver, 3k/month- SIP HDFC prudence, 2k/month each in PPF n PF. I want to understand 2 things:
1. How do i manage my expenses? – I admit tht I m bad at writing them n tracking them.
2. Wht percentage is ideal for INVESTMENTS, EMI, HOUSEHOLD EXPENSES, DISPOSABLE INCOME(to spend my way) ?
@Rahul Oswal, I dont have any loans and own a house too. 🙂 Thank You.
@Rahul Oswal, Rakesh/Vivek – HELLLPPPP !!1
@TheWealthWisher, Didn’t we get this question a day before as well? I remember answering to this question somewhere.
@Rahul Oswal,
Good to hear that you have no liabilities.
Please read the below article on goal-based planning –
https://www.thewealthwisher.com/2010/10/07/setting-financial-planning-goals-or-goal-based-investing/
I think you can add two more SIP’s namely large/multi-caps to your list. DSP Top 200 and HDFC Top 100 are good. As for managing expense i maintain an excel sheet in which i enter my daily expenses. Initially its tiring but slowly you would get used to it. After few months you will like it as you can compare your monthly expenses.
Now on how much percentage is ideal for investments, expenses, etc. I think Vivek can give you a better advise.
@Rakesh,
Rakesh mean to say HDFC Top 200, it is indeed a goof MF to invest in.
@Vivek K, good not goof* 😛
@Rahul Oswal,
Before you read my comments down, I would like to tell I am also a reader (not expert) of this website like you. Just giving my comments in case if it helps you.
1. How do i manage my expenses? – I admit tht I m bad at writing them n tracking them.
Hmmm it’s tough and specially you don’t like to write.
Still I would suggest to get an excel sheet, you have to track it. If you can’t do it very often in all small small things, then try the below if you can.
— Try to pay all your (monthly) bills (Mobile, Internet, DTH, Electricity, etc) using your credit card, so at the end of the day, you just need to track/write only your credit card bill. Make sure you pay your credit card bill on time without forgetting. If you use CreditCard well, it’s a good tracker. You will get sms on every transaction and realize how much you spending.
— If you have two bank accounts, keep one account only for your expenses, don’t keep much money in that account. Decide the amount and fund that much amount only to expense bank account monthly. With this you can easily get to know if you are spending more than what you decided and you have to fund it more than once.
Whenever you withdraw money from your bank account, write it to your excel sheet, consider it as expense done, you can devide it in personal and household / grocery expense as per your convenience, so you won’t feel bored writing all expenses.
— Once you are good with this, try to make a habit and manage your expenses in detail. Slowly you can become good in writing and tracking and take more interest.
2. Wht percentage is ideal for INVESTMENTS, EMI, HOUSEHOLD EXPENSES, DISPOSABLE INCOME(to spend my way) ?
Here I think you need financial planner.
Investment – If you can do 15-30%, it would be really great. Distibution % has to be decided based on your retirement need and goals.
EMI – Better you keep away from this and keep as low as possible. Many people use formulas here for home loan, as you have home no need to worry.
Household Expense – Depends on your life style. Better if it’s within 20%, have no reason why am suggesting this %.
Disposable Income – Plan for it before you do and make sure your investment doesn’t affect much.
Make sure you have Emergency Fund with you before you invest or spend your way.
Wait for other people to answer your query.
Also depending on the comments here specially for your second question, good to have a good financial planner.
@Chirag,
This is great stuff, very detailed reply. After reading your comments, I don’t think you are just a reader. A different view on paying your utility bills. I have added all my utility bills to my savings account and every month i get alerts and pay it. Enabling mobile alerts is a good feature. Please continue to contribute and share your views.
@Rahul,
Please wait to hear more from other experts.
@Rakesh, Mind blowing contribution guys.
Here is what the split shoudl be.
Save at least 15% – if you are not saving this much, you are in RED zone. Take it higher if possible, more importantly, invest the saved money !
Do not have total EMI’s worth 40%.
The rest which is left is for daily living expenses and discretionary and non discretionary expenses.
Between these 3 heads, all your money is used up ! If one increases, the others have to decrease.
@Chirag, Amazing response Chirag. Well done and you surely are not “just” a reader. 🙂
@Vivek K, Thanks so much Vivek and Rakesh :). Learning all from here only, wish more people will slowly start reading this website.
Dear sir,
In this article iam not understanding one thing . how you got this
Final Corpus Required = Rs 27,393,900/-.
plz explain
regards,
swethareddy
If we need Rs 16,43,634/- in a year from some corpus (X) at 6% rate of return, then :
6% of X = 16,43,634
So X = 16,43,634/6%
X = 27,393,900
Does this help ?
thanq very much sir for giving reply
My monthly expense is Rs 50,000. This includes my all expenses including kids education, travelling, shopping,medical etc. How much monthly expense I would have after my retirement ? I am 44 years old. Also isn’t investing so much amount in mutual fund SIP is risky ?