It was question from one of my friend about How much retirement corpus is required in India?
To be honest there are so many variable factors like your lifestyle (high / medium / low), present annual expenses (including travel), inflation rate, your current remuneration and ability to save.
Although it can run into too much complexities, I will try to make it simple with one hypothetical example and assumptions on inflation rate as 6% over next 20 years.
So my friend Rohini who asked me query is a software professional and her running age is 35.
She wants to plan for her retirement at the age of 55, which means she have 20 years in hand for her financial planning.
Note – same plan is applicable to younger age people too, however they need to invest less to get the same financial impact over time period.
Rohini’s Current financial status as reference for retirement planning :
Monthly Salary (in hand after deduction of taxes) | = 80,000 Rs (per month) |
Present monthly expenses | = 40,000 Rs (per month) |
Present Annual expenses Misc expenses includes Vacation, insurance, medical, marriage functions etc. | = 40,000 x 12 + Misc expenses like travel |
= 4.8 L + 1.5 L = 6.3 L | |
Total Annual Expenditure | = 6 Lacs (Approximate) |
Available years for financial planning (Current age is 35 years and wants to retire at 55 years) | = 20 years (for retirement) |
Post retirement life period (Assuming retirement at age 55 and life expectancy as 85 years) | = 30 years (post retirement) |
Inflation till age of 85 years (pre and post retirement assumed constant for ease of calculations, in actual it will vary) | = 6% (Inflation will take care of increase in expenses / commodity prices every year and she need to make sure to have corpus which will enable her to sustain lifestyle till age of 85 years) |
ROI Returns on Investments which she will be doing pre-retirement period | = 15% (If I assume low returns than 15% then calculations will go haywire, so she need to make sure that her investments generate annual average returns of 15%) |
ROI Post retirement she will have to shift investments to safer path which means the returns will reduce | = 6% Here I have assumed 6% returns, however one must remember that more returns possible by proper investment strategy. |
So considering all above inputs Rohini will need about 5.2 Crores as a corpus for her peaceful retirement life from a financial standpoint :
Your Plan for Retire Young Retire Rich | |
Expected monthly expenses when she retires at the age of 55 years would be – | 1,60,357 Rs per month ### TABLE 1 ### Please see table at the end of this post to see how figure of 1,28,284 Rs arrived at |
Estimated amount as Retirement Fund (Considering life expectancy of 95 years and assuming current monthly expenses of 40,000 with pre-retirement inflation of 6% and post retirement inflation of 6%) | 5.2 Crore Rs *** Here I am assuming that she will invest in stable instruments to get 6% per annum returns = 2.6 Lacs per month, so that even after monthly expenses she will be able to save some money for further compounding However best is to keep money invested in market and withdraw money only as and when needed, this will avoid tax penalty which will occur on withdrawal of complete amount. |
How to achieve this goal? | |
To achieve this financial goal, she will have to invest in an asset class / product that gives her annualized returns of at least 15% on your investments till the age of 55 years and 6% returns on post retirement on funds collected. | |
You can choose to Invest
%%% TABLE 2 %%% Calculations for the same are added at the end of this post. | 31,667 Rs per Month |
3,80,000 Rs per Year | |
28 Lacs Lump-sum amount |
So now its comparatively simple for Rohini to decide upon how much she need to invest. She got clear guidelines to achieve her retirement at age of 55.
However for that she must ensure that all the investments she is doing must yield at least 15% yield which may be possible only by investing into Share market related instruments like Direct shares long term investment or Mutual funds.
Disclaimer : Mutual fund investments are subject to market risks. Please read the scheme information and other related documents before investing. Past performance is not indicative of future returns. Please consider your specific investment requirements before choosing a fund, or designing a portfolio that suits your needs.
Now since she is getting about 80K per month and her expenses are around 50K per month, she have following 2 options –
Option 1 – SIP of 31K per month
She can simply start focusing and begin SIP of Rs 31,000 Rs per month in Equity mutual funds or direct shares
(I suggest you to consult a good financial advisor to select correct instruments – spending few Rs as fees will be really worth for it)
Since she is earning 80K and expenses are 50K, investing 31K will be hand to mouth condition for her in the first couple of years (later her salary will grow by some amount to make situation comfortable)
Also there can be other expenses like investing into car, home or luxury items.
so if Rohini starts with 31K per month she will have tight budget leaving little scope for any emergency funds or needs or leaving comfortable life.
So she can opt for option 2
Option 2 – Increase SIP by 5% each year
She can go for a step up SIP of Rs 25,000 Rs per month in Equity mutual funds.
Means she can start with lesser amount than target, however since she will be then fall short of final target corpus, she must target increase in SIP amount by 5% each year.
So in simple words,
First year she starts SIP of 25K per month,
Second year she need to do SIP of 25K+5% more = 25+1.25K = 2.625K per month
$$$ TABLE 3 $$$ See detailed sheet at end of this article for 5% increase per year in SIP
Instead of starting with investing 46000 pm, she can start off with a lower amount i.e Rs 27000 pm and increase the amount by 10% every year. This is known as a step up SIP. Now essentially what a step up SIP means is that suppose for year 2018, you start investing 27000 pm. From next year you will basically step up your SIP amount by 10% i.e from 2019 onwards , you will be investing 29700 pm. Similarly from 2020 onwards, you will be investing 32670 pm, and so on.
Monthly Investment | 25,000 Rs |
Yearly increment in SIP | 5% |
Returns expected from investment per year | 15% |
Total duration | 20 Years |
Final Corpus at end of 20 years | 5,53,22,666 Rs |
Here the concept of Step-up SP will help her easing out the situation –
- Automatically the amount she want to increase in investment per month will fall inline with here annual salary hike. So she will be able to accommodate the investment plan without any pinch.
- Also at the end of 20 years you will have slightly higher corpus. Also it provides you to save more over years as the financial condition stabilizes.
I think this simple example calculations done by me for Rohini will help all of you to determine your targets. I will not be able to put the excel sheet here since my server does not allow excel sheets for the risk of virus.
So if anyone wants the calculations excel sheet, please mail me at mahesh@trekbook.in with name and mobile number and I will send the excel sheet to you
You need to keep in mind that this example is simplified to great extent and in real life there are many variables including your salary, lifestyle, medical conditions, senior citizens at home, other liabilities like sisters marriage, emergency expenses planning etc.
So you may at least keep these basic calculations ready so as to decide upon targets for monthly saving.
Remember that Habits are more important than how much you save.
Saving regularly irrespective of market conditions is more important.
Final words – How much retirement corpus is required in India?
If you plan well in advance at early age, with regular and small incremental investments you will for sure beat the inflation and retire young retire rich.
However one more important thing to note that you need to make sure that instruments you select are giving you minimum 15% returns on investment for which proper financial planning is a MUST.
### TABLE 1 ###
Age | Expenses per month | Inflation rate |
35 | 50,000 | 6% |
36 | 53,000 | 6% |
37 | 56,180 | 6% |
38 | 59,551 | 6% |
39 | 63,124 | 6% |
40 | 66,911 | 6% |
41 | 70,926 | 6% |
42 | 75,182 | 6% |
43 | 79,692 | 6% |
44 | 84,474 | 6% |
45 | 89,542 | 6% |
46 | 94,915 | 6% |
47 | 1,00,610 | 6% |
48 | 1,06,646 | 6% |
49 | 1,13,045 | 6% |
50 | 1,19,828 | 6% |
51 | 1,27,018 | 6% |
52 | 1,34,639 | 6% |
53 | 1,42,717 | 6% |
54 | 1,51,280 | 6% |
55 | 1,60,357 | 6% |
%%% Table 2 %%%
Corpus at end of 55 years Calculations
Corpus at end of 55 years | 5,19,20,022 | 5.19 | crores | |||
Rate of Return assumed | 15% | |||||
Calculations | ||||||
Age | Amount Invested start of year | What you have at end of Year | Per month saving target | Age | Amount Invested start of year | What you have at end of Year |
35 | 3,80,000 | 437000 | 31,667 | 35 | 28,00,000 | 3220000 |
36 | 3,80,000 | 9,39,550 | 36 | 37,03,000 | ||
37 | 3,80,000 | 15,17,483 | 37 | 42,58,450 | ||
38 | 3,80,000 | 21,82,105 | 38 | 48,97,218 | ||
39 | 3,80,000 | 29,46,421 | 39 | 56,31,800 | ||
40 | 3,80,000 | 38,25,384 | 40 | 64,76,570 | ||
41 | 3,80,000 | 48,36,191 | 41 | 74,48,056 | ||
42 | 3,80,000 | 59,98,620 | 42 | 85,65,264 | ||
43 | 3,80,000 | 73,35,413 | 43 | 98,50,054 | ||
44 | 3,80,000 | 88,72,725 | 44 | 1,13,27,562 | ||
45 | 3,80,000 | 1,06,40,634 | 45 | 1,30,26,696 | ||
46 | 3,80,000 | 1,26,73,729 | 46 | 1,49,80,700 | ||
47 | 3,80,000 | 1,50,11,788 | 47 | 1,72,27,805 | ||
48 | 3,80,000 | 1,77,00,556 | 48 | 1,98,11,976 | ||
49 | 3,80,000 | 2,07,92,640 | 49 | 2,27,83,773 | ||
50 | 3,80,000 | 2,43,48,535 | 50 | 2,62,01,338 | ||
51 | 3,80,000 | 2,84,37,816 | 51 | 3,01,31,539 | ||
52 | 3,80,000 | 3,31,40,488 | 52 | 3,46,51,270 | ||
53 | 3,80,000 | 3,85,48,561 | 53 | 3,98,48,961 | ||
54 | 3,80,000 | 4,47,67,846 | 54 | 4,58,26,305 | ||
55 | 3,80,000 | 5,19,20,022 | 55 | 5,27,00,250 |
$$$ TABLE 3 $$$ – Step up SIP
Corpus at end of 55 years | 5,53,22,666 | 5.53 crores | |
Rate of Return assumed | 15% | ||
Calculations | |||
Age | Amount Invested start of year | What you have at end of Year | Per month saving target |
35 | 3,00,000 | 345000 | 25,000 |
36 | 3,15,000 | 7,59,000 | 26,250 |
37 | 3,30,750 | 12,53,213 | 27,563 |
38 | 3,47,288 | 18,40,575 | 28,941 |
39 | 3,64,652 | 25,36,011 | 30,388 |
40 | 3,82,884 | 33,56,730 | 31,907 |
41 | 4,02,029 | 43,22,572 | 33,502 |
42 | 4,22,130 | 54,56,408 | 35,178 |
43 | 4,43,237 | 67,84,591 | 36,936 |
44 | 4,65,398 | 83,37,488 | 38,783 |
45 | 4,88,668 | 1,01,50,080 | 40,722 |
46 | 5,13,102 | 1,22,62,659 | 42,758 |
47 | 5,38,757 | 1,47,21,628 | 44,896 |
48 | 5,65,695 | 1,75,80,421 | 47,141 |
49 | 5,93,979 | 2,09,00,560 | 49,498 |
50 | 6,23,678 | 2,47,52,875 | 51,973 |
51 | 6,54,862 | 2,92,18,898 | 54,572 |
52 | 6,87,605 | 3,43,92,479 | 57,300 |
53 | 7,21,986 | 4,03,81,634 | 60,165 |
54 | 7,58,085 | 4,73,10,677 | 63,174 |
55 | 7,95,989 | 5,53,22,666 | 66,332 |
Rajendra Thanawala says
taxation of income at 55 years is not considered
Mahesh says
Thank you sir for reminding.
So at end of retirement at 55 age, if she gets back complete funds, it will attract income Tax, so best way is to withdraw small amounts as needed from main corpus (as monthly expenses) and maybe one time withdrawal of some contingency fund for emergency needs.
Post modified accordingly now 🙂