Sunday, 14 December 2014

How much do I need to Retire in India ?

How much money do you need to have saved up to retire in India?  Well that is the million dollar question isn't it!  
Or rather the crore rupee question.  Probably the single most difficult question to answer for anyone planning to retire.  Knowing if you have saved up enough, before taking the plunge is critical to give you the confidence to kickback and retire from your daily grind.  But how do you go about figuring this out? How can you know for sure that you have got enough? There are so many factors that can impact this magic number, and you just cannot afford to go wrong on this one.  In this article, I explore some thoughts on how to estimate the retirement corpus or portfolio that you would need today, to be able to successfully retire.  I will share a simple method to estimate the retirement corpus, and also explain any assumptions I have made in my calculations.
You retirement corpus is like any other financial goal, and your best chance of attaining it, begins with being able to define it accurately and with as much detail as possible.  For this there are really only 2 clear thoughts that you need to have.  How many years do you expect to spend in retirement, and what will be your average annual expense during your retirement years.  Amazingly enough, if you have a good handle on just these 2 questions, you are well on your way to figuring out your retirement needs.

Your years in retirement should be fairly straightforward.  You should know at what age you will retire, and also you can estimate how long you expect to live.  Your retirement age is a matter of personal choice, and you can in fact play around with a few different retirement scenarios to understand what works best for your situation.  For example you could try out retirement at 50, 55, 60 and 65 just as a thought exercise, to see what kinds of retirement corpus you would need for each of these cases.  Your life expectancy should be a conservative estimate probably in the 85-90 year range.  So if you plan to retire at 60, you should be planning to spend atleast 25-30 years in retirement!  If you choose to retire at 55 (which could hardly be termed as early retirement) and expect to live to 90 (or provide for your spouse till that time) you would need to plan for 35 years in retirement.  This is almost the same number of years in retirement as the number of years you would have worked till the age of 55!

Your average annual expense is a little trickier to figure out.  We could spend a whole different article discussing various ways to calculate this, and then project the expenses into retirement.  For the purposes of this discussion, let us assume that you have accurately judged your current annual expenses.  For this you can look at your bank pass book for the last few years, and average out your annual expenses.  Further we will assume that in retirement your expenses will continue to remain the same as now.  For example if your expenses now are 6Lakhs per annum, we will assume that even in retirement you will continue to spend the same amount (adjusted for inflation of course)  This requires that you don't fundamentally change your lifestyle in retirement from what it is today.  You will also have to account for any large one time expenses separately (for example your child's marriage, is a large non-recurring expense, that needs to be separately accounted for)

With the above 2 settled, here is a table that will help you figure out the retirement corpus you will need to accumulate by the time you retire.  The table shows you different scenarios for the number of years that you will spend in retirement on the Y-axis in yellow.

The percentage by which you can grow your corpus above and beyond the inflation rate is shown on the X-axis in pink.  Clearly you will invest your retirement corpus in various avenues like debt, equity, real estate etc.  Your goal at a minimum must be to make sure your corpus grows at the same rate as inflation.  The table shows you the multiplier to use on your annual expenses to determine the retirement corpus.  In other words your retirement corpus should simply be the multiplier from the table above, with your annual expenses.  Let us take some examples to explain how to use this table.  If you can grow your retirement portfolio in line with inflation, then the calculation is simple.  Look at column 1 in pink, which shows 0% returns over and above inflation.  For a 15 year retirement, you simply would need to save up 15 times your annual expenses in this scenario.  Since your corpus is growing annually in alignment to inflation, you simply need to keep withdrawing your annual expenses adjusted for inflation, and in 15 years your corpus will be exhausted.

As you can see in the entire first column, the retirement corpus is simply your annual expenses multiplied by the number of years in retirement.  The only way to reduce the requirement for retirement corpus, is to actually grow the corpus faster than the rate at which inflation increases your annual expenses.  Take the second column for 1% corpus growth over and above inflation, in the blue colour.  This is a scenario wherein if annual inflation is say 8%, you are able to build and manage a retirement portfolio that grows consistently at 9%.  For a 15 year retirement, you will now see that you only need to save up 14 times your annual expenses.  If you can grow your portfolio beating inflation by 4%, for a 15 year retirement you requirement will be ~11 times your annual expenses. Of course, you will have to take more and more risky investment strategies to be able to beat inflation by a larger percentage margin.  I have generated the table only upto 5% growth better than inflation, since I don't think in the long run it is practical or feasible to beat inflation consistently by more than 5%.  

So if you can beat inflation by about 2-3%, and plan to spend about 15-20 years in retirement, then the table tells you that you will need to save up about 12-16 times your annual expenses to be able to successfully retire.  I would recommend you go on the conservative side, and save up 16 times your annual expenses for this case.  If your retirement time period is longer like 25-30 years, you will need 17-22 times annual expenses, and again conservatively I would recommend going with the 22 multiple. 

So in summary, all you need is the number of years you plan to be in retirement, the confidence to be able to beat inflation by 2-3%, and a handle on your annual expenses to be able to compute your required total retirement corpus.  I know there are several other ways to arrive at the final retirement portfolio that you will need.  Please feel free to use other approaches, and let me know if your ballpark estimate is the same as my simple by effective multiplier based calculator.  If you have questions on how to use the table, do post your queries and I will do my best to answer, and clear your doubts.


  1. Interesting site. Your table however is incorrect - you cannot compute a retirement corpus based on the difference between Corpus-ROI and Inflation Rate. The reason is that the ROI applies to the entire corpus, but the inflation rate applies only to current expenses. For example for a 10 year retirement period, with expenses of Rs 100 per year, zero inflation and zero ROI, I would need Rs 1000/-. With an ROI of 10% (and inflation running at 8%), I would need less than 1000/- (Rs 838.20), with ROI of 12% (inflation 10%), I would need even less (Rs 824.42)

  2. Thank you for sharing such great information. It is informative, can you help me in finding out more detail on Retirement Plans India,i am interested and would like to know more about this field and wanted to understand the basics of Retirement Plans India