Will I have enough money to retire in India? This question makes most people lose their sleep. And, rightfully so, most people are aware that they need to save for retirement. But really understanding how much money you would need to retire comfortably takes a lot more effort.
In this post, we will tackle this very question of – how to calculate money required to retire early in India?
My father retired from his public sector job after spending 35 years in the same job. He now enjoys his retirement life with a decent pension and healthcare taken care of by the govt. But would that be the case when it comes to me?
I am talking to you if you are a small business owner, self-employed, or a private sector employee. Let me remind you – There is no pension waiting at the end of 35-year working life.
If you’re in your 20s or 30s you might find retirement years away. While that is true but remember time is your best ally and worst enemy.
Do you think 2 crores ( 20 million) is a big enough number? How about 5 crores? Would you do it with 10 crores? Do you think you can retire with this money in India?
A 30-year Retirement could cost you 2-4 crores depending on whether you spend 50,000 or 1,00,000 a month. Mind you this doesn’t even account for inflation, health care, and kids college and marriages, etc.
The situation gets more complicated when you add early retirement to the mix. The more time you will spend in your retirement the larger the corpus (money) you’ll need.
What is Retirement Corpus?
In simple words, retirement corpus is the money that will support your lifestyle in your golden years i.e. when you are retired
WE all know the bigger the nest egg bigger the payout but the original question is still there. How much money do I need to retire?
The retirement corpus required is gigantic and can’t be built overnight or even in a couple of years.
Building a large enough retirement corpus requires a lot of discipline and the sooner you start the better. And, the younger you are the larger the corpus you’ll need.
Start with a Plan
Now you understand what is retirement corpus and why it is important for you. As they say, you would never reach your goal unless you have a plan. So, the next step is to build financial independence or a retirement plan.
This plan will be material to accumulating the require honey pot so you can spend your golden years comfortably.
There are quite a few ways to achieve the large enough nest-egg to be comfortable in your golden years. That said, it is a combination of these four things – Earn More, Spend Less, Save & Invest, Make Passive Income
- Earn More – Making more money can definitely help with your retirement and can actually accelerate your journey to financial freedom. The more money you make the more you can potentially Save and Invest.
- Spend Less – Controlling your expenses is the most crucial aspect. There are two things that you need to be mindful of – spend less than you earn, and don’t let your expenses grow with your earnings. The more you spend now the larger the amount of money you will need in retirement to maintain the lifestyle.
- Save & Invest – You have saved money but you need to invest in the right investment vehicles. Mind you Fixed Deposit and Life Insurance plans are not investments. You can read more about my thoughts on wrong financial advice on Quora
- Make Passive Income – This is similar to earning more money but having one or multiple passive incomes can help you financial freedom and can set you on the path to early retirement. You can read my guide on side hustles that you can start doing to make passive income now.
Let’s jump right into building a plan.
Step 1: Estimate Your Retirement Expense
The first step in determining the amount of money you need to retire is to estimate your expenses in retirement. One way to do it is to start with current expenses and adjust them for the expenses that wouldn’t exist in retirement e.g. home loan, car loan, etc. Then add the expenses that would add in like healthcare (medical), travel, philanthropy or whatever you may have.
Still confused, let’s take an example: Ms. Priyanka has a monthly expense of Rs. 1,00,000 which includes a Home Loan of Rs. 35,000 and Car loan of Rs. 15,000. Before retirement she expects the home loan to be paid off fully but she expects to change the car every 5 years and expects to continue to pay the car loan in retirement years.
She also expects to spend Rs. 10,000 in medical expenses and Rs. 20,000 in travel. So her expenses in retirement would be Rs 95,000 (Rs. 1,00,000 – 35,000 + 10,000 + 20,000). So her retirement corpus needs to generate a minimum of Rs. 95,000/month for her to be able to retire comfortably in her home in India.
Note, that this calculation is not adjusted for inflation yet. We would do that in Step 4 and see the impact of inflation on the required money to retire.
P.S. You can also try to reduce your expenses by moving to a cheaper city/town in India during retirement.
Step 2: How Long Will You Live After Retiring From Work?
Nobody wants to talk about dying but let’s face it – everyone has to die one day. The good news is people are living longer now than in the past. And the bad news is living longer means you’ll need a lot more money after you stop working. Note that lifespan depends on many things and also depends on your family history.
When it comes to retirement this is the only step where I want you to be optimistic. Assume you are going to live long (much longer than your ancestors). You would rather plan for a longer lifespan and die sooner vs. running out of money in your old age.
My recommendation is to plan for at least 30 years in retirement if you plan to retire at the age of 60 and more if you plan to retire early. E.g. If you plan to retire at the age of 45 you should plan for 30 + (60-45) = 45 years.
Just so you know I am planning for a 40+ year retirement and I plan to retire at 50.
Step 3: Expected Rate of Return
Now the fun part and a place where a lot of people make a mistake. Be overly conservation when estimating the rate of return during your retirement years. In India, I wouldn’t use a number higher than 7%. Anything higher than 7% is too risky.
Do whatever but don’t fall prey to the shady schemes offered which promises a guaranteed return. Do your research and don’t take on unnecessary risk. The simple reason is you have to keep your risk low and preserve your capital while making a decent return.
Step 4: Adjust For Inflation
Inflation is the reason why things you need cost more every year. This means the money you need to cover your expenses will keep increasing every year.
Historically the inflation rate in India has been between 3.8% to 13.5%. However, as India continues to grow we can expect the inflation should stabilize around 5-6%. To be safe, you should assume around 6%.
Image Credit: Statista
So what does it mean? It means that things will get 6% more expensive every year i.e. if something costs you Rs. 100 this year you can expect to pay Rs. 106 for the same thing next year.
Let’s take it a step further and understand the impact of inflation on your expenses when you are off work. In order to do that, I will use the case of Ms. Priyanka from Step 1. You saw that she would need Rs. 95,000/month in retirement before inflation adjustment and has 25 years to retire. To calculate the amount of money required per month during retirement we can use the following formula:
FV = PV (1 + R)T
FV = Future Value of Money
PV = Present Value of Money
R = Rate of Inflation
T = number of years
Based on this Formula Ms. Priyanka would need Rs 4,24,172 / month in the first year of retirement. Wow that a significant jump from the Rs. 95,000 which she planned in Step 1.
I mind you that money required will increase every year due to inflation and to put things in perspective by the time she turns 90 she would need Rs. 25,54,608.57/month.
Do you see now why retirement planning early on is so critical? And why your retirement corpus needs to remain invested during your retirement years so it can continue to grow.
Step 5: Calculate Money Required To Retire
Now that we have identified all the different pieces required to calculate the amount of money needed to retire comfortably in India. Can you guess how much money Priyanka needs to accumulate to be able to retire?
She would need over 12 crores accumulated by the age of 60 (her retirement age). To be precise she would need Rs.12,01,13,710 in her retirement corpus. Now that is not a small number and it will take anyone a long period of time unless you are related to Mukesh Ambani in some way 🙂
So how do we arrive at this number? The answer is to use a Growth Annuity Formula
Let’s understand what this formula means:
Initial Payment = Expenses in the first year of Retirement
g = Inflation Rate i.e. rate at with expenses will grow
r = Expected rate of return on investment
n = number of years in retirement
PV = Retirement Corpus needed
To make it simple for you I have created an easy to use retirement calculator India spreadsheet. To use this spreadsheet click on the link and then Make a copy by clicking File -> Make a copy. Once you make a copy of the spreadsheet you can add your own numbers and calculate the amount of money you need to retire in India.
Retirement Calculator Online
In addition to using my simple spreadsheet which allows you to control all moving parts. You can use several other online comprehensive retirement calculators to understand what is your magic number?
Here is the list of my favorites:
- MoneyControl – https://www.moneycontrol.com/personal-finance/tools/retirement-planning-calculator.html
- PersonalFn – https://www.personalfn.com/calculator/retirement-calculator
How to Use The Online Retirement Calculator
It is really easy to calculate the amount of money you need to retire using this online calculator.
- Start by making a copy of the sheet and saving it in your own google drive
- Fill in your personal information – Name, current age, retirement age, and retirement years
- You can change the assumptions of the inflation rate and the expected rate of return in retirement. I recommend you use the default but you can play with the numbers to try out multiple scenarios.
- The calculator will crunch the number for your required corpus. This number is the amount of money you need to retire.
- Bonus: The calculator can also help you estimate the amount of saving you need to do every month to accumulate the retirement corpus. You can enter the expected rate of return – I assumed 14% but you can choose a different number based on your risk appetite.
- Also if you have already saved some money for retirement you can enter that to see how it changes the saving requirements.
I know planning for your golden years could get overwhelming and retirement might feel impossible. Not knowing how much money is needed to retire can be stressful.
But with better planning, right investments it is doable. In this post, we walked through the various pieces of calculating the money required to retire.
You now know the fundamentals of how to calculate retirement corpus. You can also use this online retirement calculator to estimate the amount of money you need to accumulate for a successful retreat post-work life.
I am curious to know how much money do you need to retire in India? Please do share your numbers in the comments and if you like this post subscribe to my email newsletter and the new articles will be delivered straight to your inbox.