Retirement planning may be a more ambiguous affair than you think. However, with the correct estimates and calculations, this conundrum can be dealt with tactfully. How much money does one require to lead a comfortable life?
A Retirement Corpus is the fund saved and put aside during your work life to receive an adequate pension during your retired life. It can take up to 20-25 years to accrue, justifying the motto “The earlier you start, the more money you will save”. The corpus requirement varies from person to person, depending on current income and savings. Other than this, the factors which affect the retirement corpus are:
- Age of retirement
- Life expectancy
- Number of dependents to be supported after retirement
- Lifestyle
- Health
- Real estate/property owned
- Rate of inflation
- Personal aspirations after retirement
- Other assets and liabilities
From the above factors, the most significant and frequently overlooked one is the rate of inflation. Inflation is the sustained increase in the general price level of goods and services over a given period of time. A family’s monthly expenditure of ₹60,000 will balloon up to ₹430,000 a month after 30 years at an inflation rate of 7%. Keeping this in mind while saving for your retirement is quintessential as inflation rates can vary from anywhere between 4%-9% (the average estimate to be around 6% growth). Owing to this, your current expenditure will most definitely not be sufficient for basic subsistence 20-30 years from now.
How do I calculate my retirement corpus?
As aforementioned, a retirement corpus depends on a number of factors and isn't the same for everyone. A simple and foolproof method of calculating the estimated retirement corpus is given below.
For finding your required retirement corpus, the following estimations are required: the age at which you will retire, life expectancy, rate of return from investments while accumulating corpus, rate of return on your investment after retirement and rate of inflation. From this data, find years remaining to your retirement, number of years after retirement and inflation-adjusted returns.
After this, to find the (inflation-adjusted) annual expenditure after retirement, inflate your current annual expenditure. Now, you can calculate your retirement corpus, which will be sufficient for subsistence till your estimated life expectancy. Once done calculating the corpus, you can find how much is required to invest monthly up to your retirement to accrue the corpus.
An illustrative example:
This can be illustrated by the example given below:
Consider a person who's 35 years old, planning to retire at 60 and who has an estimated life expectancy of 85 years of age. The inflation rate is 7% and with their rate of return before and after retirement being 12% and 8% respectively, the inflation-adjusted return can be calculated from the formula given below.
Inflation Adjusted Returns = 1 + Rate of return (before retirement)/1 + Inflation rate - 1 x 100
The above data can then be expressed in a tabular form:
| Current Age | 35 |
| Life Expectancy | 85 |
| Number of Years till Retirement | 25 |
| Expected Age of Retirement | 60 |
| Rate of Return (before retirement) | 12% |
| Rate of Return (after retirement) | 8% |
| Inflation-Adjusted Terms | 0.93% |
Assuming current monthly expenses = ₹75,000
We can calculate the inflation-adjusted monthly and annual expenditure post-retirement, from which the retirement corpus can be found using the method mentioned above.
| Monthly Expense Post-Retirement | ₹4,07,057 |
| Yearly Expense Post-Retirement | ₹48,84,689 |
| Total Retirement Corpus | ₹10,84,51,091 |
| Monthly Target Savings | ₹57,722 |
A corpus of ₹10.8 crores may seem like a lump sum amount to save, but with the early onset and correct plans of saving and investment, the target is definitely attainable. Although this retirement corpus may look surplus, what must be kept in mind is the magnitude of change which a high inflation rate can bring about in 25 years. A number of sites can also be found and used to calculate your required retirement corpus like this.