RETIREMENT CORPUS - HOW MUCH IS ENOUGH?


Retirement is an imminent event in everybody’s life. Around the age of 60 years most working people retire; a stage that leads an individual from “active earning” stage to “passive income” stage. The confusion is how much funds is enough or adequate to be able to lead a successful retirement life.Some say Rs.5.00 crore, another few say Rs.10 crore and you think just about Rs.1.00 crore should be enough and the confusion continues.

Let’s simplify this for you. What exactly is retirement? This is a stage when we do not actively work and earn but we will still have daily expenses to meet such as coffee/tea/milk, vegetables, fruits, meat, groceries, fuel expenses, cable TV, internet/phone/broadband, electricity/water bills, newspapers/magazines, maid salary, cooking gas and the likes.

These expenses are the same that we would be doing even when we were actively working and earning which will continue even after we retire. What would have stopped at the time of retirement are expenses towards children (assuming they are educated, married and financially not depending on you), no commitment of paying house rent and paying any loan EMIs.

If your today’s mandatory monthly living expenses (assuming you are in your 30s) are Rs.25000 that comprises of you, spouse, kid/s excluding school fees and the related then when you reach your retirement age you would be spending for the same items. But let’s cut your children expenses for the future since they would be settled and financially independent by then; the expenses after you retire would be for you and your spouse. So, we can consider approx. Rs.20000 per month as your today’s living expense and we can consider annual inflation of 6% to arrive at your future expenses.

Assuming you are 35 years now and retire at 60 years, then 25 years from today you would need about Rs.85000 per month to be able to lead a normal life.

Here comes the next critical aspect - future bank interest rates. The interest rates are set to go down to as low as 3% to 4% p.a. over the next two decades due to various economy related factors. Hence, your building of retirement corpus is not only dependent on inflation based calculations alone, but should be calculated on the future interest ratesas well because the retirement corpus would be deposited in a bank to earn regular interest.

To be able to achieve Rs.85000 per month of withdrawal to meet mandatory living expenses you might need to create a corpus of approx. Rs.3.50 crore. Rs.3.50 crore x 3% rate of interest / 12 months = Rs.85000. This means that you may need Rs.3.50 crore or a maximum of Rs.4.00 crore as your retirement corpus.

You should start your building your retirement corpus when you are in your 30s with this method of calculation. There is no point in saving more and creating a bigger corpus which you may not need at all. You would waste your today’s earnings which should be avoided.

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