Retirement on your mind? The required corpus varies but here’s how to plan for it

• The value of money goes down with time as inflation rises.
  
• One needs a much higher amount in retirement than one does for monthly expenses today.
  
• Other financial goals like children’s education needs to be planned separately.
  
  

The average age of retirement in most countries, including India, is 60. However, life expectancy is inching up by the year and an average Indian is expected to live to the age of 70.42 years, a 33% rise from 2022, as per macrotrends. Hence, it becomes so important to plan for retirement to sustain one’s accustomed lifestyle.

To put it simply, there comes a point in life when one is no longer earning an income, but expenses do not stop. In fact, they tend to go up, primarily because of medical reasons. The increased life expectancies mean one may live to 90 years or more, which makes planning for retirement even more crucial.

How much do you need for retirement?

While one cannot say how long one will live, one thing is sure, retirement needs to be planned for during the working years. Estimating how much one needs for retirement will depend on several factors.

Know your monthly expenses

To know your retirement corpus it is important to get an idea of what your monthly expenses will be in the first month after retirement. Your current monthly expenses can give you a fair idea, but expenses post retirement will not include cost of home loan EMIs and expenses for kids, though it may include costs for hobbies or additional costs to meet medical expenses.

What is the rate of inflation

This is a very crucial aspect of calculating your retirement corpus. The time value of money goes down with inflation so you would need a much higher amount in retirement compared to your monthly expenses today. “Inflation results in rising cost of living, and the actual value of your retirement corpus will erode substantially by the time you retire. So, it is important to have a futuristic point of view, while planning for retirement,” says Neeru Seal, Research analyst, Alpha capita.

At a rate of 6% inflation, ₹1,00,000 today will be equal to ₹5.74 lakh in 30 years. So if you assume that you will require ₹1 lakh in the first month of retirement which is 30 years away, you will actually require ₹5.74 lakh.

What are your other liabilities

Retirement is only one of the long term goals. Other financial goals would include paying off the EMIs for a home and more importantly, the education of children. It is easy to take out money from the retirement fund for other needs, but could be a big mistake as it can throw retirement planning completely out of gear.

“Don't forget to include your children's education expenses when estimating your retirement savings. Save separately for their education goals,” says Satyen Kothari, CEO & Co-Founder of Cube Wealth.

While one may factor in all these aspects when planning for retirement, and it might very well be enough, one needs to plan for situations when things do not go according to plan. “Plan scenarios in which you would experience higher inflation, lower returns, and higher life expectancy. That way you could avoid running out of money during your retirement years,” says Abhishek Kumar, SEBI Registered Investment Adviser and Founder, SahajMoney.com.

Let us take a look at three separate family situations and get an idea of how much retirement corpus they may require.

Scenario 1

Here, let us look at a double income couple with no kids who earn a combined post tax income of ₹30 lakh per annum. Let us say they plan to retire at 60, and require ₹1,00,000 per month at current cost after retirement. Their assumed life expectancy is 80.

Other assumptions include an inflation of 6%, pre-retirement investment return of 12% and post retirement investment return of 6%. Assuming that their current retirement corpus is zero, they would need a corpus of ₹13.6 crore at retirement. For this, they need to invest about ₹39,000 every month.

Scenario 2

In this scenario, we consider a couple whose post tax income is ₹50 lakh per annum with two kids. This means that they have other liabilities, mainly the education of their kids.

If this couple requires an income of ₹1.5 lakh per month post retirement, all the other factors remaining the same, they need a retirement corpus of ₹20.4 crore. For this they require to invest around ₹58,000 every month.

Scenario 3

Here, we consider a couple whose post tax income is ₹1 crore annually. They also have two kids. So, their situation is similar to the previous couple, except that their income levels are higher.

If this couple requires an income of ₹3 lakh per month post retirement, all the other factors remaining the same, they need a retirement corpus of ₹40.8 crore. For this they require to invest around ₹1.16 lakh every month.

As we have seen, these are all calculations based on certain scenarios and assumptions. Real life is almost always different, and a lot of other unexpected factors may come in.

However, it is still prudent to have an idea of the amount of retirement corpus one may need and plan towards it. Periodically reviewing one’s retirement plan and making changes as and when required, is important to set up a strong foundation for one’s retirement.