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 do 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%.
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.
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/- !!!
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.
That was easy ! Go ahead and input your values and check for how much money you need to save for your retirement.
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.