You need 18 to 35 times your annual expense at 60 to retire
How much money do we need to retire at age 60 can be answered in many ways. I wrote earlier (you can read it here: http:// bit.ly/2ruHEtK) that you need 8 times your annual income at age 60 to retire comfortably. Plenty of people wrote back to say that a more useful benchmark will be an expense multiplier rather than an income multiplier. An expense multiplier is, in fact, a better way to crack the same problem because at the same level of income, different families will have very different expense behaviour. I know families that don’t know where their money goes and others who have tiny expenses because they don’t party or buy branded stuff or take vacations abroad. But an expense multiplier also assumes that you know how much you spend. Many families are clueless of their annual expense number – money comes in and money goes out.
So how much do you need? At age 60, you need between 18 to 35 times your annual expenses to retire with the lifestyle you are used to. If you are spending an annual ₹6 lakh at age 60, you need a retirement corpus of just over ₹1 crore to retire if you plan to eat up all the money and leave nothing to the heirs. If you want to leave the entire corpus to your kids, the same annual expense will need a corpus of ₹2.1 crore. If you plan to leave half your corpus, then you are targeting a corpus of around ₹1.5 crore. The younger you are today, the larger will be the corpus in the future, but the multiplier remains the same. You can inflate your current annual expense at an inflation rate of 6% to arrive at what you will be spending when you are 60 and then use the multiplier to see the face of your corpus. Hope it scares you into starting to invest right away.
How should you use this rule of thumb? First, remember that this is a rule of thumb. This means that it is a crude approximation of what you will actually need. For instance, if you plan to work beyond 60, then the corpus needed will shrink. If you have other sources of post retirement income, say rental income, then the corpus needed is less. Remember that we are assuming a return of 8% in retirement. If you are too conservative and think you can do just 7%, this will double your corpus requirement to 70 times annual expenses if you want to leave the money for the kids. Just a difference of 1% in the expected return can reduce the burden on your present self. So it is a good idea to understand safe investing and give an equity exposure to your money.
Whatever method you use, the retirement corpus is a large number. The faster you start targeting it the better it is. Don’t wait to get a large monthly surplus to begin. Begin with what you can and then keep topping it up. But start now.