The amount of money needed for retirement in India depends on various factors including the lifestyle one wants to maintain, expected post-retirement life expectancy, inflation, and more. Here’s a general breakdown of how you might estimate retirement needs:
- Current Monthly Expenses:
- First, estimate your current monthly expenses. Consider everything: rent or home maintenance, utilities, groceries, healthcare, entertainment, transportation, etc.
- Let’s say it’s ₹50,000 currently.
- Inflation:
- Inflation reduces your money’s value over time. In India, a common estimate for inflation has been around 6% annually (though this can vary).
- If you’re 30 now and you plan to retire at 60, that’s 30 years from now. Using the inflation rate, ₹50,000 today would be equivalent to nearly ₹287,000 in 30 years.
- Monthly Expenses at Retirement:
- Using the above example, you might need ₹287,000 per month when you retire to maintain a similar lifestyle.
- Post-retirement Life Expectancy:
- If you retire at 60, and expect to live until 85, that’s 25 years post retirement.
- Total retirement funds needed (without considering any post-retirement income) = ₹287,000 x 12 months x 25 years = ₹86,100,000 (or ₹8.61 crores)
- Income after Retirement:
- Factor in any post-retirement income you might have: rental income, pension, etc.
- Subtract this amount from your monthly requirement to get a new adjusted amount.
- Investments & Returns:
- Consider the return on any investments you’ll be making between now and retirement. Safe withdrawal rates from your retirement corpus typically range between 3-4% per annum to ensure sustainability over 25-30 years.
- Healthcare:
- Healthcare costs typically rise as one ages. It’s crucial to factor in potential medical expenses, which might be above average inflation. Consider getting a health insurance policy or a dedicated healthcare fund.
- Major Post-retirement Expenses:
- Consider any large expenses you anticipate post-retirement (e.g., your child’s wedding, travel, buying a new home, etc.)
- Emergency Fund:
- Always have an emergency fund for unexpected expenses. This might be separate from your main retirement corpus.
- Taxation:
- Factor in any taxes on the withdrawals from your retirement corpus.
The amount of money needed for retirement in India varies depending on a number of factors, including:
- Your current lifestyle and desired lifestyle in retirement
- Your age and health
- Your expected lifespan
- Your investment returns
- Inflation
However, a general rule of thumb is that you need to accumulate a retirement corpus of 30 times your annual expenses. This means that if your annual expenses are ₹10 lakh, you will need ₹3 crore saved for retirement.
Here is a complete break up of the factors that affect your retirement corpus requirement:
Current lifestyle and desired lifestyle in retirement
If you are used to living a lavish lifestyle, you will need to save more for retirement. Conversely, if you are willing to downsize your lifestyle in retirement, you can get by with less.
Age and health
If you are retiring at a young age, you will need to save more money to last your entire retirement. Additionally, if you have any health problems, you may need to factor in the cost of medical expenses.
Expected lifespan
The longer your expected lifespan, the more money you will need for retirement. This is because you will need to support yourself for a longer period of time.
Investment returns
The return on your investments will also affect your retirement corpus requirement. If you are able to generate high investment returns, you will need to save less money. Conversely, if you are only able to generate low investment returns, you will need to save more money.
Inflation
Inflation is the rate at which prices for goods and services increase over time. If you do not factor in inflation, your retirement corpus may not be enough to support you in your later years.
Breakup of retirement corpus
Once you have calculated your retirement corpus requirement, you can start to think about how to allocate your funds. Here is a suggested breakup:
- 50% in equity investments
- 30% in fixed income investments
- 20% in cash and liquid investments
This breakup will give you a good balance of risk and return. You can adjust the allocation based on your own risk tolerance and investment goals.
How to start saving for retirement
The best way to start saving for retirement is to start early. The earlier you start saving, the more time your money has to grow. Even if you can only save a small amount each month, it will add up over time.
There are a number of different ways to save for retirement in India. Some of the most popular options include:
- The Employees’ Provident Fund (EPF)
- The Public Provident Fund (PPF)
- National Pension System (NPS)
- Unit Linked Insurance Plans (ULIPs)
- Mutual funds
You can also choose to invest directly in stocks and bonds. However, this is a more risky option and you should only do it if you have the knowledge and expertise.