What is a safe retirement corpus that one should aim for?

Jul 1, 2019
I am 30 years old. How much retirement corpus should I aim for?
1 Answer
Jul 1, 2019

Hold your breath! The answer is 7.8 crores! And you can achieve this by starting with an SIP of Rs 15,500 from the age of 30.

Don’t lose your sleep already over this seemingly large amount. We will break this down into simple steps, so that you can plan for your retirement.

The answer depends on many factors like monthly expenses, inflation, retirement age, life expectancy etc. So lets make a few assumptions:

  • Monthly expenses: Rs 60,000 (includes food, grocery, rent, travel, entertainment etc). So annual expenses are Rs 7.2 lakh.
  • Retirement Age: 58 years. A 30 year old has 28 years to invest for retirement.
  • Life expectancy: 85 years
  • Inflation: 6%
  • Rate of return on your investments: 10%

Lets say you maintain the same standard of living after you retire. So your monthly expenses (adjusted for inflation) will remain similar. When you retire at the age of 58, your annual expenses will be:

The image demonstrates the effect of inflation and time on your annual expenses when you retire. Inflation plays a very big role here.

So, now whatever retirement corpus you have accumulated needs to generate 37 lakhs per annum from the age of 58 until your life span of 85 years. So lets say you put your money in an Fixed Deposit which gives you 7% (which 1% above inflation. Interest rates are typically linked to inflation). So your annual expenses of 37 lakhs should be 7% of your corpus, right? Which comes to around 5.3 crores. THIS APPROACH HAS FLAWS! The villain here is inflation.

Inflation will not stop when you retire. So assuming an inflation rate of 6%, your expenses will still continue increasing. So if you withdraw 37 lakhs from your corpus in the first year of retirement, the remaining amount should be sufficient to generate 37 lakhs + inflation of 6% the next year. And so on. I think you get the drift.

Now this is where the calculations get a little complicated. I will use a retirement calculator (there are several online, just google) and input all our assumptions in it. And it throws out a number of 7.8 crores! There you have it, your safe retirement corpus!

EPF to your rescue!

Now don’t lose your sleep over this seemingly large amount of 7.8 crores. Remember that if you are a salaried employee, you are already saving towards your retirement in the form of EPF (Employee Provident Fund) deducted from your salary.

The employer and employee contribute 12% each of the employee’s salary (basic + dearness allowance) to the EPF. If your EPF contribution continues for the next 25 years (it will if you are employed in India) then about 2 to 2.5 crores of the corpus will be taken care of by EPF. The calculations are a bit complicated, I have taken them from a financial plan created by one of the advisors on DhanWise.

Lets say 2.5 crore of your corpus comes from EPF. So now you have to achieve the balance 5.3 crores of the 7.8 crores via some other means.

How much SIP do you need to accumulate 5.3 crores?

If you decide to invest in mutual funds to achieve the objective then your SIP amount will depend on the future rate of return (not predictable), asset allocation towards debt and equity etc. If we assume a 10% annualized return on your investments for 28 years and that you will increase your SIP amounts by atleast 7% every year (reasonable assumption to make if your income increases every year) then you need an SIP of approximately Rs 15,500 per month

Source: DhanWise SIP Calculator

What about other goals?

Now retirement is not the only financial goal that you will have. There will be other goals like child’s education (given the inflation rates in education, this will take a major chunk of your investments), buying a house, car etc.

Retirement is just one of these goals. Hopefully the above process has given you a guideline to follow when planning for your goals.

Important Points:

  1. Many a assumptions have gone into the above calculations like retirement age, life expectancy, inflation, rate of return on investments, monthly expenses etc.
  2. If any of the assumptions change then the SIP amount will change.
  3. The process that I have demonstrated above is called Financial Planning.
  4. Financial Planning is not a 1 time activity. You need to review the plan every year (or every 6 months) because the external environment keeps changing (interest rates, inflation, your income, your expenses, your goals etc)

Doing financial planning by yourself may be overwhelming. Plus you may not have the time to select and monitor your investment options. If you find yourself in this situation then it is best to consult a professional financial advisor to do this for you. Contact a good advisor in your locality or your network. If you don’t find one then checkout advisors on DhanWise.

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Financial Planning for a 30 year old salaried employee

Sachin Shah is a 30 year old Senior Software Engineer, working at an IT services company in Bengaluru. He and his wife want to plan for their retirement and also want to save for their child's education, wedding and for buying a car.

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