If you had Rs 1Cr (approx USD $200,000) would you be able to retire right now in India? If you need to meet retirement expenses over 30 years, would Rs 1Cr suffice? How much can you spend monthly, if you need the Rs 1 Cr corpus last over 20 years. To understand these and several related questions, read on.

Similar to the 1 million dollar mark (USD $1M) as a financial milestone in the US, in India in recent times, 1 Crore (Rs 1Crore) is the magic figure that is often talked about. It is not as small as 1Lakh which is somewhat easily achievable these days, but not so far out that it is completely out of reach for the diligent and disciplined saver. So lets say that through hard work, patience and discipline (or by winning the lottery) you have achieved the goal of having a total accumulated corpus (networth) of 1Crore. By total corpus, I mean the total amount you have in liquid investable assets like bank accounts, Mutual fund investments, FDs, stocks, etc. I do not want to include your primary residence as an asset, since you need it in your retirement days to live in. Any additional real estate equity (if you are lucky enough to have it) can be included in the total corpus, as long as you realize that the entire corpus will need to be utilized to generate income once you have retired.

Similar to the 1 million dollar mark (USD $1M) as a financial milestone in the US, in India in recent times, 1 Crore (Rs 1Crore) is the magic figure that is often talked about. It is not as small as 1Lakh which is somewhat easily achievable these days, but not so far out that it is completely out of reach for the diligent and disciplined saver. So lets say that through hard work, patience and discipline (or by winning the lottery) you have achieved the goal of having a total accumulated corpus (networth) of 1Crore. By total corpus, I mean the total amount you have in liquid investable assets like bank accounts, Mutual fund investments, FDs, stocks, etc. I do not want to include your primary residence as an asset, since you need it in your retirement days to live in. Any additional real estate equity (if you are lucky enough to have it) can be included in the total corpus, as long as you realize that the entire corpus will need to be utilized to generate income once you have retired.

Now the big question is

**Can you use this corpus to fund all your expenses and never have to work again? If you had 1Crore Rupees right now, could you give up your job right at this moment, and retire? Now this is a very tough question to answer, since it depends on several factors that will be unique to your situation. It is dependent on how many years you need to spend in retirement, do you have kids?, what are your monthly expenses?, do you plan to leave a inheritance for your kids, your health etc. Since I cant tailor this article for all situations, I will instead assume a range of expenses, and compute the probability of a 1Crore corpus enabling retirement.***Is 1Crore enough to retire on in India?*I will also assume for the purposes of this example that you can generate a 12% annual rate of return on your invested retirement corpus. This should be the average rate of return across your asset allocation which could be in rental real estate, MFs, direct equity stock holdings and dividends, FDs, PPF etc

Another key factor we cannot ignore is inflation. Many times people forget to factor in this destroyer of wealth. I will go with an 8% inflation rate, since these days we are subject to rampant inflation, and I think it will take several years if not decades for the inflation rate to cool off.

With these basic assumptions let us first start with a simple example wherein you have accumulated Rs 1 Crore, and are now ready to retire. You estimate that your annual expenses will be Rs 6Lakh (Rs 50,000 per month) Can you fund your entire retirement expenses from your retirement corpus? Let's do the math and see how this works out. I have plotted the total corpus and the increasing annual expenses (since we have a 8% inflation rate) in the graph below, with the total corpus on the left axis and the annual expenses on the right axis.

Notice that in the early years your corpus keeps increasing since you are getting 12% investment returns, while you are not withdrawing much for your annual expenses. Your total corpus peaks in your 16th year of retirement at Rs1.6Cr !! Unfortunately for you, your annual expenses are also growing at the rapid 8% inflation rate. So in your 16th year of retirement you will need Rs19 Lakh to fund the same lifestyle which you could afford in your 1st retirement year at only Rs6 Lakh. Your annual expenses now keep increasing and make a significant dent in your total retirement corpus. From the 16th year onwards your corpus steadily decreases and finally runs out completely in the 26th year. So basically for this situation, you can fund a retirement of only 26 years. If you are in your 60s, then potentially 26 years should be sufficient to cover the remainder of your (and your spouses) life needs. Mind you, that you will not have any corpus left at the end of 26 years to pass on as an inheritance to your heirs. However if you are in your 50s, you could be cutting it close since in 26 years you will be in your mid 70s, which would be a terrible time to run out of money!

Finally, continuing to assume a 12% investment return rate, I show below how long your retirement corpus will last for different inflation rate assumptions and annual expenses. I start with Rs3 Lakh annual expenses (or Rs 25,000 monthly expenses) and keep increasing the annual expenses to as much as Rs 7 Lakhs (or Rs 75,000 in monthly expenses) For each of these cases, the height of the bar, shows how many years you can assume the Rs 1Cr corpus will last.

The blue bars assume an inflation rate of 8% and the red and green bars assume 9% and 10% inflation rate respectively. Naturally as the inflation rate goes up, your total corpus runs out faster. This table will help you pick an inflation rate you are comfortable with, and assess if you can retire with the Rs 1Cr corpus. For example if you are in your 50s and want to be conservative in your inflation rate prediction and go with 9%, then you should target monthly expenses of Rs 25,000 or lower (Rs 4 Lakh annual expenses) to ensure that your corpus will last for atleast 30 years (which is what you will need, to ensure you have money well into your 80s)

I hope this table will help you figure out if Rs 1Cr will be enough to fund your retirement dreams. You would be surprised at how little Rs 1Cr can fund in monthly expenses if the inflation rate continues to remain very high!

Excellent article.

ReplyDeleteThis comment has been removed by a blog administrator.

DeleteThanks Kiran, I appreciate your feedback.

ReplyDeletefor ur first graph, with inflaition of 8% and return of 12%, your net rate of retun is 4% For 1Cr it woul be 4 lakh, how come even after 6lakh ur corpus is increasing?

ReplyDeleteGood question Sailesh. The math works something like this. The 12% rate of return applies to your entire corpus, however the inflation rate only applies to your expenses. Therefore, for the 2nd year your corpus will increase to (100L - 6L )*1.12 = 105.28L. For the 3rd year the corpus will be (105.28 - 6*1.08)*1.12 = 110.656L and so on. So you see for the initial few years the corpus indeed keeps increasing.

ReplyDeleteLIVE SIMPLE LIFE STYLE DURING RETIREMENT TIME OR CONTINUE WORKING TILL YOU REACH 2 CRORE

ReplyDeleteGood article, also it shows how important to hv a bigger corpus initially, say if you had Rs 1.1 Cr initially then at 8% rate of inflation and 12% return you would probably be able to extend the time period from 28 years to 35 years. Also it is important to note that 12% is after/ post tax so gross return should be 14% or the net difference between savings and inflation should be 6-7% which is quite high and cant be sustained over a long period of time.

ReplyDeleteAlso interestingly the corollory which may be entirely true is that, given the same cirsumstance ( return and inflation) the expenditure cannot be more than 5% of your net savings!

You are assuming 8% inflation on the cost of living. This is assuming that there will be no change in lifestyle. I dont think this is realistic. Even if I were working I would constantly think of reducing the cost of living by cutting corners. In case of retirement I think i would be more focused on reducing cost. Hence the whole argument of 1 crore not enough makes sense assuming that I am dumb.

ReplyDeleteHi Nitin,

DeleteThanks for stopping by and taking the time to review the article.

My assumption of 8% inflation is based on the numbers that I have been seeing in India for a long time now. Our average inflation numbers have been varying around this mark for several years, and it is quite common to use 8% inflation for financial calculations in the Indian context.

As far as personal rate of inflation is concerned, it absolutely depends on the lifestyle you choose for yourself. I have generated the graph above with 8%, 9% and 10% inflation rates. I could easily generate it for a lower inflation rate if that makes you more comfortable. Personally I would rather be conservative on this front, than carry the risk of running out of money in my golden years.

Finally, since this blog focuses on early retirement, the time periods I am working with easily extend into 30-50years spent in retirement. For that kind of timeline, it should not be a surprise, that 1Cr might turn out to be inadequate.

-burntout

This is a very good article and gives a good understanding of what this kind of corpus can do. However could you also perhaps add in some unexpected expenses that could come up every three years that would require something like 4 lac expense (could be either a medical need or then a new gadget, a car etc). Will appreciate this effort as my husband and I are seriously looking at retiring in the next two years. Hope to hear from you soon :-)

ReplyDeleteExcellent article. But, a bit unrealistic.

ReplyDelete1. You won't get 12% (post tax) return on investment in any safe investment. You'll need to go the equity way for this - a very risky thing to do with retirement funds.

2. Alternative way to earn risk free return is to invest in rental property. With inflation the rentals will gain too. But, typically rental properties only provide about 4-6% returns (pre-tax). Thus any expense above 4-5Lakh a month will not be feasible.

3. While inflation is a reality, returns may not be. There can be erosion in funds with unforeseen expenses/damages.

4. An article I had read had shown how to live off a given money. It says target to live with only 4% returns while earning between 8-9% on the corpus. Effectively, more than 50% of what is earned from corpus should add on to corpus.

But, that is an western article and their rate of inflation is low. So, in India you should earn about 10-12% on investment but spend perhaps 4% to be safe!

5. Ofcourse, all the above calculations take in to account you have no expenses related to children or other dependents.

All said, Best way to plan for old age - have enough corpus earning passive income that is more than double your current expense. i.e If your expense is 50,000/month, then you should have a corpus of above 1 crore earning at 12% (post tax) per annum. This way, you'll continue to contribute to corpus at higher speed than the inflation.

If you don't have such corpus, then work as long as you can - so you are only adding to corpus - not eating it away. Rely on your retirement funds for as less years as possible.

Alternatively - Bring your living expenses down dramatically. This can be done by moving to smaller town, smaller house, watching all expenses. May not be pleasant in beginning, but you'll be surprised how little a man (without dependents) really needs to survive.

I have not understood your graph and example as x axis denotes annual expances at 9% inflation and expanses of 4lac money will last for 40 years

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DeleteSuperb article. I wouldn't really worry about the other comments. When you try to keep it simple ...... the noise distorts the effort. For others who have posted on this article --- if you are so good with numbers/ graphs/ predictions why read articles from others, Go Figure It Yourself.

ReplyDelete@Burntout: I will see if I can follow your articles. I like your style.

@Tatya vinchu - chhyala tu ekade pan aalas ka ? Marathi rooms kami padat hoti ka :D

DeleteNice article. I had tried to calculate this couple of years back. But I had assumed an inflation rate as 10% per annum, bank interest rate as 9% per annum payable quarterly, TDS as applicable to senior citizens (between 60 years to 80 years) & subsequently when they become very senior citizens (above 80 years) and arrived at this magic figure of 0.92 to 1.07, which I called as Nest Egg Factor.

ReplyDeleteThe formula is as below.

Corpus Amount I need after retirement = Annual Expenses as of today * Number of Years I might live after retirement * Nest Egg Factor.

For example, if my annual expense is Rs. 12 Lac as of today and I might live for 40 years post retirement then,

Corpus Amount Required = 1200000 * 40 * 0.92 = Rs. 4.4 Cr.

or maximum Corpus Amount Required is 1200000 * 40 * 1.07 = Rs. 5.13 Cr.

A retired person can live peacefully, if he uses the above formula to calculate the corpus fund required.

In the above calculation, I have assumed that the retired person person owns a house (or rentals are accounted within the annual expenses), has no other liability and does not want to leave any corpus fund for dependents.

Warm Regards,

Adarsh

Can you suggest the amount and avenues of investing assuming I would like to retitre immediately and my present monthly expenses is fifty thousand per month.... I assume that I will live for additional 44 years as I am just 41 now

ReplyDelete1 CR in fixed deposits is a very good money to live a good life in india the only thing is that you have to be easy going in life. put all the savings in post office deposits in various names and all that is tax free.

ReplyDeleteI was planning to retire on 1 Cr but now your article evoked me to work more and fight for one more Cr. Damn it.

ReplyDeletewhats your current age ?

Delete36

DeleteYou have kids Hacker? I am told their education (both primary and secondary) is the biggest expense you need to worry about.

DeleteDid you do some math around this? I am interested as well in it as I am same age and have 2 kids.

Hi Raj, I have only one kid and I know how expensive it is. I did math and I heard medical costs are quite expensive now. With unpredictable inflation, I think I will have to work whole life.

Deletedear

ReplyDeletereally a good article if u add a excel for this it will be much useful pl provide if possible

Simply awesome. I am glad you did this homework. Like few others above, if only you could attach an xls, would have been the icing on the cake

ReplyDeleteHi, Looking for Like Minded Investors for an exciting web based education recruitment Job board, for a start up in Hyderabad, sales projections are expected at 36 crores from 2nd year, Investment per year less than one crore; Interested can call me for further details - 7842507153

ReplyDeleteIts as good as to die early in 60s rather than keep worrying whole life for money. How ? Simple. Don't go for medication and stop worrying.

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ReplyDelete