Widely read:
I am a 38-year-old working in the corporate sector. I intend to plan for an early retirement in my late 40s. There are multiple retirement calculators available online but I find the calculations too speculative (for example, inflation and interest rate). Is there a realistic way to get to pragmatic numbers? - Anonymous
Unfortunately, there's no escaping inflation. No matter how much you wish, inflation will increase your living costs, making it tough to arrive at a precise retirement amount. One can only make an estimate.
That said, you can follow a pragmatic thumb rule to determine how much money you'd need in your retirement years.
Step 1: Calculate your current annual expense
Step 2: Apply 6 per cent inflation each year to your annual expense until you retire
Step 3: Multiply the amount by the number of years you may spend in retirement
Your case study
For example, let's assume your current monthly expense is Rs 50,000 and you are planning to retire in 10 years, the calculation will be as follows:
- Your annual expense is Rs 6 lakh (Rs 50,000 x 12 months).
- In 10 years, your yearly expenses after factoring in the 6 per cent per annum inflation will increase to Rs 10.74 lakh.
- Since we assume you'd retire at 48 and are expected to live until 80, multiply Rs 10.74 lakh by 32 (80-48).
That comes to Rs 3.44 crore. This is roughly how much you'd need for your retirement. One may argue that even this corpus would earn you money, but let us ignore this added dimension for simplicity's sake.
What you should do
This number may seem overwhelming, but if you invest regularly and stay disciplined, you can build this retirement kitty.
- However, you'd need to invest in equity to meet long-term goals like retirement.
- Debt-oriented investment options like PF (Provident Fund) and FDs (fixed deposits) aren't good enough.
- Neither are debt funds, both from long-term returns and tax perspectives.
To get a list of our analyst-recommended equity mutual funds that can meet your retirement goals, visit Value Research Premium.
Don't forget
Even after retirement, keep a third of your corpus in equities because it has proven itself to be the best inflation-beating investment option in the long run.
The remaining amount can be kept in debt for capital preservation.
To know how to generate regular income during retirement, we'd suggest you read this piece.
This article was originally published on April 27, 2023.
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