It is advisable to start saving for retirement as early as possible to benefit from the power of compounding and ensure adequate funds for retirement. The most suitable age to start saving up for is in the 20s.
How Much Money to Save for Retirement in India?
Retirement is an important stage of life that needs careful planning to maintain financial stability. Therefore, it is never too early or late to begin saving for retirement, and the amount you need to save may vary depending on several aspects, like the retirement corpus you aim to build.
This article will discuss the numerous aspects that affect how much money you should set aside for retirement to develop a savings strategy tailored to your needs. Read on if you are wondering how much money you need to retire.
What Is Retirement Corpus?
Retirement corpus is the entire sum of money a person needs to save to meet retirement aspirations. Mostly, this amount comprises the retiree's anticipated living expenditures, healthcare bills, and other prospective expenses.
The retirement corpus is essentially the savings account a person will use to maintain their living expenses after they stop earning. Therefore, early retirement corpus calculation is crucial for planning and saving purposes. By developing a retirement corpus plan, you can better understand how much you need to invest and save to achieve your ideal retirement lifestyle.
How Much Money is Needed After Retirement?
To find out how much money is needed to retire in India, you must first list down the types of expenses every month, such as lifestyle aspirations, travel, housing and more.
The corpus you need to retire comfortably in India depends on factors like lifestyle goals, sources of income post-retirement, and inflation. To estimate the amount of money you need for retirement, you can use the following formula:
Money needed for retirement = (annual expenses x number of years in retirement) / (1 + inflation rate)^(number of years until retirement)
Therefore, if your estimated annual expenditure post-retirement is ₹10,00,000 and you have about 20 years before retirement. So with an inflation rate of 6%, you must build a retirement corpus of ₹2.5 Crores.
How Retirement Corpus Works?
Planning a retirement corpus is an important step towards building your retirement fund. Before deciding how much to save for retirement, you must start by earning money. This can be achieved by employment and a steady wage or through income from investments, rental properties, or a company.
The amount one needs depends on several factors, including their retirement age, lifestyle choices, and estimated life expectancy. Pensions, social security payouts, and individual savings are a few popular sources of retirement income.
You can pick from equities, bonds, mutual funds, and real estate, to construct a retirement corpus. The goal is to invest in assets that will provide returns over time, enabling the corpus to increase and keep up with inflation.
How to Estimate Retirement Corpus?
The key to early retirement is early savings. Therefore, there are several stages involved in estimating your retirement corpus.
Now, let’s take a look at the steps of retirement corpus calculation with an example:
Say, Mr Das is 40 years old and planning to retire at 65. Currently, his annual expenses are about ₹9,00,000. The returns from his investments are expected to be 12% pre-retirement and 8% post-retirement. The inflation rate is expected to be 7%, and his life expectancy is assumed to be 95 years.
Now, the five main steps for calculating are as follows:
1. Calculate the Number of Working Years
The number of years Mr Das has before he retires is:
Retirement Age – Current Age = 65 – 40 = 25 years
2. Calculate Yearly Expenses at the Retirement Age
Yearly expenses can be calculated using the 'FV (Future Value)' function: Future Value (FV) = PV × (1 + r) ^ n (PV= present value; r = interest rate)
Therefore, the yearly expense at retirement age will be Rs. 48,84,689 (approx.) at a constant rate of 7%.
3. Calculate Your Inflation Adjusted Return
The formula to calculate this return is: ((1+ROI)/(1+Inflation Rate))*100
Inflation - Adjusted Return after Retirement = ((1+8%)/ (1+7%)) *100 = .93%
4. Estimate Life Expectancy After Retirement
If the expected life expectancy is 95 years, then the life expectancy after the requirement will be:
Life Expectancy – Retirement Age = 95 – 65 = 30 years
5. Calculate the Retirement Corpus
Finally, the retirement corpus can be calculated using the ‘PV (Present Value)’ function and constant rate of .93%: Retirement corpus = (years in retirement X annual expenses) / (1 + inflation rate) ^ (years till retirement)
The required retirement corpus is found to be ₹12,73,61,182. You can use a financial calculator or a spreadsheet program to calculate this value.
How Should I Estimate the Monthly Expenses?
Your lifestyle and your monthly expenses will decide how much money you will need after retirement to maintain your lifestyle. Since the value of money decreases over time because of inflation, these expenses will rise. It will determine the future cost of living and the future value of these expenses.
So, to account for these, a calculator will consider your standard of living, yearly inflation, and costs like bills, rent, household salaries, fuel, medical expenses and maintenance.
You can break down your expenses as follows:
Groceries and other household expenses
Clothing and dining
Furniture and home appliances
Medicine and Healthcare
Travel and vacation
The money required to maintain your lifestyle post-retirement depends on various factors such as current monthly expenses, the standard of living, as well as inflation. So, it is crucial to start saving early and calculate the future value of expenses to determine how much money you need to retire.
Aiming for a retirement corpus that is 15-20 times your annual income is advisable. Saving for retirement should be a priority to ensure financial stability and a comfortable retirement.
FAQs about How Much to Save for Retirement
It is indeed vital for every individual to save for retirement. However, saving too much can lead to a poorer standard of living during the working years. Therefore one must strike a balance between saving for retirement and enjoying life in the present.
Yes, it is possible to retire at 40, provided you have built a large enough retirement corpus within that period. To do so, you must take some crucial financial steps in your 30s. For instance, you can build enough wealth for retirement by saving about 50% of your income in your 30s and smartly investing in diverse instruments calculating their expected returns.
Yes, according to standard retirement estimates, at the age of 60, one would require a corpus of around ₹2.5 crore to survive the next 30 years (life span of 90 years), assuming a 10% rate of return on the corpus and a 5% inflation rate for costs. So, ₹3 crore is enough to retire with.
Important Articles About Retirement Planning
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