What should be my retirement corpus if my current monthly expenses are Rs 1 lakh?

A reader (age: 41, spouse, 36, wants to retire asap) wants to know, “What should be my retirement corpus if my current monthly expenses are Rs 1 lakh?”

We shall use the freefincal Robo Advisor tool to consider some scenarios.

1. Current monthly expenses that will persist in retirement: Rs. 1,00,000. We can exclude expenses for parents, in-laws, children and any EMIs.

2. Annual expenses that will persist in retirement 1,00,000. Often we forget to include annual expenses like health insurance premiums, vehicle insuran premiums, propery tax etc. So it is best to inlcude an extra month’s expenses unless your actual one-time expenses are higher. So total average monthly expenses (annual/12) Rs. 1,08,333.

3. Age at the end of current year 41. 4. Age you wish to retire 55 (we can vary this latter.)

4. Percentage by which your monthly investments can increase each year (until you have accumulated enough for retirement) 10%. This is the recommended percentage increase. Aim for at least 5% if 10% is tough.

5. Return expectations must be as low as possible. Remember this is the expected final return on your porfolio at the time of retirement. Post-tax return expected from equity investments 10 %. Post-tax return expected from current taxable fixed income 6.5 %. Rate of return expected from current tax-free fixed income 7.5 %

6. Inflation before retirement 7%. This will depend on your lifestyle but at least 6-7% should be right for most families.

7 Inflation during retirement 6%. We recommend 6%. You can try with a lower number if confident, but do not use official inflation estimates as they are usually non-representative of lifestyle creep.

8. Assumed life expectancy of younger spouse 90. We will assume the younger partner lives up to 90 and determine the retirement corpus from which an income that increases each year at the rate of 6% can be drawn via a bucket strategy.

See detailed illustrations here:

• Retirement plan review: Am I on track to retire by 50?
• I am 30 and wish to retire by 50 how should I plan my investments?
• Can I retire by age 55? Retirement Planning Case Study
• Case Study: Achieving Financial Freedom for Early Retirement
• How should I plan if I want to retire in 20 years?
• Is it possible to combine a bucket strategy with income laddering after retirement?

Results:

Corpus required for retirement at age 55: Rs. 11.25 Crores.

Initial monthly investment required including EPF/NPS contributions Rs. 1.94 Lakhs increasing at 10% a year. Note: Current investments have not been factored in. The freefincal robo advisor tool factors in current investments and also soucre of income that you may have after retirement. This will lower the investment burden proportionately.

For example a current equity porrtolio of Rs. 50 lakhs will bring down the initial monthly investment to Rs. 1.6 Lakhs. It is quite tempting to increase the return expectations to lower the investment burden, but we do not recommend this. Some balance between optimism can caution is necessary.

This is the recommended asset allocation by the robo advisor tool.

Other scenarios:

• Corpus required for retirement at age 60: Rs. 11.47 Crores. Initial investment per month: Rs 93,500
• Corpus required for retirement at age 50: Rs. 7.78 Crores. The reason for this dramatic drops is the longer runaway available for the corpus to grow in retirement. Also the initial withdrawals are lower than retirement at 60. The catch however is, The Initial investment per month now shoots up to Rs. 2.8 Lakhs.

Many other scenarios with different income streams after retirement can be easily computed with the freefincal robo tool. The key here is the current retirement corpus. If that is large then early rertirement is possible especially if the lifestyle is reasonably frugal. Which is why we urge all young earners to start investing for retirement as soon as possible.