How much do you need to retire?
For those worrying today about their retirement, your biggest challenge is ensuring that you have enough for maintaining your lifestyle in the far future. A house that will run on ₹50,000 a month today, at just 6% inflation, will need almost ₹1.6 lakh to run in 20 years and about ₹3 lakh to run in 30 years. But inflation is relentless.
At 60, if you need ₹3 lakh a month, at 70 you will need almost ₹5.5 lakh. At 80 you’ll need almost ₹10 lakh a month. If these numbers seem too bizarre, go back to the top of this column.
How do you know how much to save for an event that is so far into the future?
Given that we do not want a plan that looks at eating up capital, but want to use only the interest, rent and dividend from our money, and want to leave the assets for the children, how do we plan for retirement?
Data crunching says that if you are 30 years old and you save about 30% of your post-tax income for the next 30 years, you will have enough. If you are 40 and you save 40% of your posttax income, you are good.
But at 50, if you have not a rupee in savings, then you need to save 80% of your post-tax income—you’ve left it too late. My assumptions are that your income grows at 10% every year, your spends at age 30 grow at 6% a year, you consume 70% of your pre-retirement spend at age 61 and then your spends grow at 6%. You definitely use an equity route to retirement corpus building and you use laddering (using a mix of fixed return and equity post retirement), inflation is at 6%, risk-free return (government bonds or FDs) is at 7% and you live till 99.
I also assume that your EMI and other goals are all on top of this saving. Remember, the spends are only growing at 6%, while saving is growing at 30% or 40%—so there is enough elbow room. This model also gives plenty of elbow room for sudden global shocks by overestimating the final corpus. If you already have savings and assets, then you can save a little less. Do fac- tor in the EPF contributions and the PPF investments you make to save taxes in that 30% or 40% saving number.
The other question that worries us—how do I know that I have done enough for my retirement? If the goal is to have enough by 60, there is another rule of thumb—at age 40 you should have three times your annual income as your retirement corpus already. If you earn ₹15 lakh a year at age 40, you should have ₹45 lakh in your retirement corpus. At 50, you should have six times your annual income. If you do ₹40 lakh annual income at age 50, you should already have ₹2.4 crore in your corpus.
At age 60, or at retirement, you should have 8 times your annual salary. Earning a crore at 60, you must have ₹8 crore as corpus. Remember that these are rough rules of the road, for your individual situation you have no recourse but to find a good financial planner.
Monika Halan works in the area of consumer protection in finance. She is consulting editor Mint and on the board of FPSB India. She can be reached at monika.h@livemint.com