How much money do you need to meet your retirement needs?

Vasu is a banker, married with two kids. He has spent the last 10 years working hard, saving for the down-payment of a home loan, buying adequate insurance cover and splurging once in a while on vacations. As he nears 40, he realises it is time he started saving for his retirement. He has been told to start by calculating the goal amount. This is the corpus he should accumulate by retirement. As he wants to retire at 60, Vasu wonders how much he would need to comfortably retire and support the lifestyle he wants.

Unfortunately, there are no easy answers, nor is there a one-size-fits-all approach. In other words, it depends on the lifestyle you want in retirement or the lifestyle that you have today. Vasu must start by computing his current expenses and extrapolate the same over the next 20 years. Then he has to factor in inflation. Assuming prices rise 6% every year and his current expenses are Rs 1 lakh a month, he will need Rs 3.2 lakh 20 years from now to be able to meet the same monthly expenses. Next, he must make an educated guess about how long he will live after retirement. Whatever the estimate, it is quite clear that Vasu must plan so that the corpus lasts him at least two decades. Therefore, he must accumulate Rs 7.7 crore (3.2 lakh x 12 months x 20 years).

The next step is to make adjustments for expenses that will be different in retirement. Medical expenses will rise. He might also want to add to his travel expenses, if he wishes to globetrot. He will need more funds if he sees himself starting another business or buying another house. Similarly, there would be no home loan EMIs and children’s education expenses, considering they will all be paid for by the time he retires.

The younger he is, the less accurate Vasu is likely to be since the future is more likely to change. Thus, he will have to revisit his estimates and change course, if needs and circumstances change. It is critical for Vasu to understand the importance of making realistic and honest estimates. These are extremely important not only for estimation of corpus amount but also for determining how much he will need to save in order to build that corpus in time. How much Vasu needs for retirement will be based on his specific needs and spending habits. His ‘magic number’ will be vastly different from everyone else’s.

(The content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.)