When I was 25, I was already dreaming about financial independence. On one side, my father was enjoying his job even when close to retirement, while I was considering it (retirement) at the outset itself. Read more about how to be financially independent.

[*Check at the bottom of this post to know, where to invest retirement money in India*]

I wanted to retire for the sake of financial independence. My father was planning retirement as it was inevitable due to his age. Both of us had a different perspective about retirement.

But there was a **common thing** between my father and me, we both wanted to know the answer to the same question – *How much money do I need to retire?* The answer hides in our ‘retirement corpus’. Read more about NPS for retirement corpus building.

*[Use Online Retirement Planning Calculator]*

## Retirement Corpus

The bigger is the retirement corpus, more income it will yield. So the question arises, how big should be the retirement corpus? This is what we will try to answer in this article.

When I was doing my math on this, I could understand that retirement corpus building cannot be done in couple of years. Why? Because the amount that has to be accumulated is huge.

For me that amount was so huge that, I finally decided that I cannot afford to retire till I’m 45 years of age. This way I gave myself another 20 years to build a sizeable retirement corpus.

### The Concept of Retirement Corpus

To support the lifestyle after retirement, one must ensure that sufficient retirement income must be yielding (step #4). Retirement income will come from the retirement corpus (step #3).

The challenge is to build a big-enough retirement fund. How to do it? Earn more, spend less, save high, and use the saving to build retirement fund. Following are the 4 steps worth remembering:

**Generate Income**: How one can generate income? By doing a job or business. The idea of income generation should be to empower oneself to build a big-enough retirement corpus.**Save Money**: Generating income is only the first step. In order to build a sizeable retirement corpus, one must also save sufficient money. Why? Because this saving will ultimately build the retirement fund. Read more about tricks to save money.**Retirement Corpus**: The money saved from ones income must be invested well, to build retirement corpus*fast enough*. But the size will grow at rather slow pace – specially in initial days. One must not get disheartened, and shall continue to contribute to this cause year after year. Read more compounding investment returns.**Retirement Income**: Building a big retirement corpus is an important milestone. But this is not the end. Taking one more step is essential. What is the next step? Reinvesting ones retirement fund so that it starts generating*regular income*(post retirement). Read more about where to invest retirement fund for income generation.

Once this clarity is established, we are ready to **ask** the next questions. “*How much money will be enough to retire?* What should be the size of my retirement corpus?

## How to estimate size of retirement corpus?

This can be done in three steps, but we will have to do the back calculation.

**Monthly Expense**: This is the first step. Try to estimate what will be the expense you would like to carry after you have retired. You must also consider additional expenses like medical, travel etc which might increase post retirement.**Expected Returns**: When we are in job, we can take more risks. Hence we can afford to invest in high-risk-high-return investment options. But post retirement, our risk taking capability falls drastically. Hence our expected return from investment should be accordingly tuned. I will not expect more than 7% return from my retirement portfolio. Read more about how to measure investment returns.**Size of Corpus**: This is the final step. It will tell you what will be your required retirement corpus. How to do it? Use this**formula**: Corpus size = (Monthly Expense x 12) *100 / 7. The logic is that,*the retirement fund should be big enough to generate enough ‘interest income’ to take care of all daily expenses of life*.

Suppose ones monthly expense is say Rs.10,000. The person decides to invest his retirement savings in a monthly income plan which yields a return of 7% p.a. What should be the size of retirement corpus (which generates Rs.10,000 per month)? Size of corpus = (10,000 x 12) *100 / 7 = Rs.17.15 Lakhs.

## 1. Estimate Monthly Expense

Suppose you are 59 years of age. In next few months, you are going to retire from your job. *What will be your expenses after retirement?*

One must be careful while answering this question. Why? Because here, one must neither overestimate nor underestimate the requirement.

So how to approach this question? Create a break-up of your total expenses into following six (6) heads, and quantify each one of them as shown below. I have also added some values for exemplification.

**Home Management**: Utility bills, foods, maintenance etc: Rs.4.5 Lakhs per annum.**Vacation**: Money required for managing annual vacations: Rs.0.5 Lakhs per annum.**Health Care**: In old age the cost of managing health is high: Rs.1.0 Lakhs per annum.**Income Tax Payment**: Money to be paid to the government as income tax: Rs.1.5 Lakhs.**Emergency**: Money required to handle emergencies: Rs.1.5 Lakhs.**Inflation Adjustment**: Money that must be added back to the retirement fund to negate the effect of inflation: Rs.1.5 Lakhs.

Total annual expense after retirement (sum of #1 to #6) is **Rs.10.5 Lakhs per year**. What is this number, Rs.10.5 Lakhs?

It is the income that our

retirement corpus must generateeach year, post retirement. In other words, the size of retirement corpus must be big enough to generate a minimum income of Rs.10.5 lakhs per annum.

## 2. Estimate Size of Corpus

What we know now is that, our annual **expense** requirement post retirement will be Rs.10.5 Lakhs per annum. To meet this expense requirement, our retirement **income** must be at least Rs.10.5 lakhs per year.

This income will come from the retirement corpus. The retirement corpus must be big enough to generate Rs.10.5 lakhs per year of regular income.

How to know the size of Retirement corpus? Use this formula:

I have done the calculation. To generate an annual income of Rs.10.5 lakhs per year, @7% per annum, the size of the invested funds must be **Rs.1.5 Crore**.

### 2.1 Adjust for inflation…

**What we need to adjust for inflation?** The calculated retirement corpus (Rs.1.5 Crore).

**Why we need to adjust it for inflation?** Because Rs.1.5 Crore is the required-value if one retires tomorrow. If the person is going to retire after 20 years, the required corpus will be much higher.

What will be the value of Rs.1.5 Crore after 20 years? How much it will increase? We can use this formula:

**Corpus(n) = Corpus(t) * (1 + 6%) ^n**

- Corpus(n) = Corpus after 20 years.
- Corpus(t) = Corpus required today (1.5 Cr).
- n = 20 years.
- 6% = Average inflation in next 20 years.

Corpus(n) = 1.5 * (1+6%) ^(20) = 1.5 * 3.21

**Corpus(n) = Rs.4.85 Cr.**

So what this calculation land us into? More trouble? Yes.

Rs.1.5 Crore as retirement corpus anyways was a huge amount. But now what we have in our hand is even bigger value (Rs.5.0 Crore). But to build it, we have 20 years time in our hand.

My personal estimate is that, investing Rs.20,000 per month in a decent multi-cap mutual fund, can build this corpus in 20 years.

- Read more about potential mutual fund returns here.
- You can also use my SIP calculator to estimate the monthly investment necessary to build the retirement corpus.

## Conclusion

We wanted to know how much money do I need to retire at 45? To get an answer, we started with expense calculation (Rs.10.5 Lakhs / year – example).

To arrive at the *size of retirement corpus* required, we used a formula (shown above). The calculated value of the required retirement corpus was Rs.1.55 Crore.

But this value of Rs.1.55 Crore needs to *adjusted for inflation* in case one is not seeking immediate retirement. We have seen, how one can adjust the retirement corpus for inflation.

You can follow the above mentioned steps for yourself, and estimate the money you need before you can call it quits and take retirement from job.

**WHERE TO INVEST RETIREMENT MONEY?**

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Hi Mani

I think below needs correction and bit confusing. You mentioned in your details as below –

“Why we need to adjust it for inflation? Because Rs.1.5 Crore is the required-value if one retires tomorrow. If the person is going to retire after 20 years, the required corpus will be much higher.”

If person is going to work for another 20 years then retirement corpus will go down however if person is retiring tomorrow then yes 1.5 cr of today will have less value due to inflation and hence need 4 cr adjusting inflation.

Inflation inflates our expenses. Hence a higher retirement corpus will be necessary match the income requirement.

I am 45 years old NRI. I plan on retiring in 2 years (at age 47 years) and moving to India for good. We are a family of 3 (myself, wife, and our 6 year old child).

My total savings at retirement (in 2 years): Rs. 9.5 crore

If I will live in India, from the above total Rupee amount, I will buy a home fully paid worth (so no debt): Rs. 2.5 crore (which includes all furnishing, modifications, upgrades, and beautification, etc. and any and all repairs to make the house fully functional, liveable, and aesthetically right)

Retirement corpus (post buying a home), that is available for investment (such as FD, etc.): Rs. 7 crore

If as of today (i.e. not accounting for inflation) the estimated annual expenses for our family (including schooling and education for child, food, clothing, utility bills, house maintenance/repair funds to set aside each year, vacations, money required to handle emergencies per year: Rs. 22 lakhs

Question: Would my Rs. 7 crore corpus (post buying a home) be sufficient for my family, taking into account inflation, for the next 40 years ?

Thanks for your query. The corpus should be enough. Make sure to invest every penny (Rs.7 Cr.) with a purpose of fixed income generation. Diversify between equity and debt.

I am age 54, two school going kids age 15 and 16. kids education cost till age 25 is estimated as 8 Crores. I own home, no loan, it is fully paid. My current annual expenses are 80 Lacks. I like to have same level of income after I retire. My retirement account has 12 Crores with 6.7% annual returns. I am short of 8 Crores to pay for College (Abroad) for my kids. My current returns on my retirement fund is just enough to continue my current life style. I need to build 8 Crores in next 4 years to save it up for kids college fee. An on average, I need to save 2 Crores per year. My current job income is 2 Cr per year, 60% of it can go in to savings. By the end of next 4 years, I would have corpus fund of 20 Cr of which 8 Crores goes for Kids College, leaving 12 Crores in the Corpus fund. I can retire at age 58 with 6.7% return on 12 Cr ie. 80 Lacks per year, own house and kids are out of the house (going to College). Does this sound like a good plan.

Sure.

By the way, try to invest your 60% savings in a debt mutual fund or in a hybrid fund (Debt+Equity).

Thanks for posting your comment.

Hi Mani,

One more query.

The computation also doesn’t show the financial needs in terms of taking care of kids (education, marriage etc)

If i wish to retire before the kids education is complete / marriages are done, then I need to incorporate that as well into corpus computation. Correct ?

Regards,

Krishna

You are right. The calculation shown in the post is only a typical example.

Why Indians are worried about Children Education and marriage so much? Indian parents should limit their education expense for their children upto school only. In College, Parents should arrange education loan for the children. With financial calculator, you can clearly see education loan or free loan from you work in same way. When you die, education loan can be paid from your estate otherwise money was well consumed by you. Not dependent on the child.

Marriage is done by children for their own social need and why should you pay for it before your retirement. I never understood this concept.

Hi Mani,

Nice article.

One query. Why is that inflation adjustment is considered twice ?

– Once in the annual need computation

– Once again for calculating the future corpus.

Regards,

Krishna

Thanks for asking.

Please read point #2.1.

Explaining very candid way

Can u guide if any one has shortage of 1.5cr as of today how he can compensate the gap

Increase income, save more, invest wisely 🙂

Nice article sir. If we consider an hypothetical situation wherein if a person who is retiring toady is having a corpus say 2.0 croree. For how many years, will he be able to generate the required income? Can you guide on this?

Thanks for asking.

First step will be to invest Rs.2.0 Crore (like in FD). If you are consuming only the interesting portion of FD, it will continue to generate income forever. The corpus of Rs.2.0 Crore will never be exhausted.

Sir, we should consider inflation also. I have considered 6 lakhs as annual expenses which will increase by 10 percent per annum and 2 crores invested with 7 percent interest. The calculation is showing the money will last for 26 years.

Good

Very easily explained with all components – especially vacation! Nice to see some understandable article on this subject! Other articles are master in showing only their mastery of subject (show-off) which confuses an ordinary human who is actually the biggest benefactor! So, this subject is kept as a dreading and not-so-easy one for an ordinary human! Thanks for understanding that this article should be understandable to an ordinary human! 🙂

Awesome comment. Thanks for liking.

Hi

In your calculation you have taken retirement corpus 5 Cr. to achieve annual income equivalent to 10.5 lac in today’s value.

Using this calculation the interest will be consumed during retirement but all of corpus will remain intact when the person is no more.

Is this not overstreching the corpus requirement. Person will slog extra years to create the corpus, which will be of no use to him after death,

Is it not better that corpus be say 3.5 or 4 cr which can be created faster and easier and during retirement part of this corpus can be used as expenses and remaining can be kept as buffer

I agree, this is one way of looking at the “required retirement corpus”. But there are many caveat to this approach. I prefer the approach of retirement corpus the difficult way. Why? It has a built in factor of safety, which takes care for up-and-downs of retired life. In old age, there can be no better safety net than a big retirement corpus.

Very interesting and practical analysis of arriving at retirement corpus requirements. Kudos for the author who has indepth knowledge and made excellent analysis, very useful for retired person’s like me. Many many thanks Sir

Thank you for the feedback

You have not considered Inflation post retirement

It has been considered. Please see Sl No. #1.6. Thanks for posting your observation.

#1.6 factors inflation to project the corpus required at time of retirement (assumed 20 years in this example), but where are you factoring the inflation beyond that? You seem to be implying that 10.5 Lakh per annum will be enough to cover the expenses you have listed in this example YoY and indefinitely?

I can understand your point. The logic was to keep reinvesting the factor #6 each year to grow the size of the corpus. Hence, more income. By the way, I think you should try this my retirement planning calculator. I’m sure it will be more helpful. Thanks.

For a 25 years old novice who want to retire by age of 36 years (i.e., in 10 yrs from now), what would you suggest?

My cashflow:

Income : 70k/month

Emergency fund: 3 lakhs

Expenses (unmarried): 20-22k/month

Please suggest further steps as I am lost.

I will suggest you to read this article in

wealth building in ones 30s. Thanks for posting your comment.I am 52yrs old and have retired today. My corpus is Rs 1.2Cr, i live in my own house and its loan free. I own two small flats which yield Rs 24000 per month. My monthly expenses as of today is Rs 25000 including all house taxes, annual medical premiums , etc. 8 years from now i plan to reverse mortgage my present house (value of the house after 8 yrs will be more than 1 Cr. Please advise if my planning is ok

@52yrs your portfolio looks good. Utilisation of Rs.1.2Cr corpus is key. As you have retired, priority should be income generation. But as your flats are already taking care of your income needs, Rs.1.2 Cr can be diverted elsewhere (for capital protection). Building a sufficiently bid emergency fund is also necessary. Thanks for posting your comment.

I’m currently 24 years old with annual package of around 2.5 lakhs. My net salary every month is around 17000. Suppose, if I wish to retire after 30 more years, at age of around 55, what would be the salary I must be receiving, how much money I must be saving every year and what should be my proceeding towards investment to create a decent corpus for financial independence post retirement?

My current corpus : Rs. 4 Cr and No debt

Current Annual expenses : Rs. 7.5 lakhs

Retirement plan : after 6 months

1. How to divide money in differnt assest class to generate regular Rs. 1.2 Lakhs and to grow the corpus?

Thanks for writing. I will suggest you to read this blog post:

https://www.getmoneyrich.com/invest-retirement-money-india/

Corpus 6 crores and no debt

retirement age 40

Yearly expenses – 720,000

Yearly income – 44,00,000 (From FD interests and Rent and after tax. FD spread across 4 senior citizens as they get 8.5% and 2 normal adults. Tax is calculated based on the slabs)

Additional income 40,000 per month from share trading but not included in the income above

Inflation – 8% each year thereby increasing the yearly expenses by 8% every year

Balance saved each year after expenses goes back to FD corpus and some to MF’s

Milestone expenses every 10th Year approx 2 crores on education and then on marriage and medical.

Based on above can one retire at age 40 with 6 crores corpus ?

Today’s Situation:

– Annual Income = 44,00,000 + 40,000*12 = Rs.48,80,000.

– Annual Expense = Rs.7,20,000.

– Net Savings = Rs.41,60,000 / Annum.

– Time in hand for retirement (assumption) = 5 Years.

– Goal (corpus to be built) = Rs.6.0 Crore

Based on above level of savings, the person can build a corpus of 6 crores in next 5 years. I think a combination of FD+MF should be good enough.