How much money is enough to retire in India?

How much money is enough to retire in India - Featured

What it means when we ask, “how much money is enough to retire in India”? It means how big shall be the retirement corpus, before one takes retirement.

Suppose Raj is 30 years old. Raj wants to retire at 50 in India. In other words, Raj wants to retire in next 20 years time. 

How much money Raj must accumulate in retirement fund to make this possible?

How to answer this question?

Before we go into details, let’s understand the concept first. What is the concept? 

The Concept

See this infographic’s…

How much money is enough to retire in India -2.1

What is shown in the above infographic’s? 

To support the lifestyle after retirement, Raj must ensure that sufficient retirement income must be yielding (step #4).

Retirement income will yield from where? From retirement fund.

Raj’s retirement fund (step #3) much be big enough. Only then, the retirement income will be sufficient to meet the requirements. 

The challenge for Raj is to build a big-enough retirement fund. How to do it? 

Raj must ensure that sufficient money is getting invested in “retirement linked savings plans”. How to ensure this? Raj must save enough money from his income (step #2). 

How Raj will save enough money? By expending income in a controlled manner (step #1).

In nutshell, what this concept says is this:

  • Step1: Earn money. 
  • Step2: Ensure enough savings
  • Step3: Use savings to build retirement fund (corpus). 
  • Step4: The corpus will yield retirement income.

Once this clarity is established, we are ready to ask the next questions…

Yes, there will be streams of questions that must be answered to arrive at a final conclusion. 

What is the conclusion we want to arrive at? How much money is enough to retire?

So lets start with the question number one…

#1. What will be my retirement expenses?

Suppose you are 59 years of age. In next few months, you are going to retire from your job.

What will be your expected expenses post retirement?

This is a very important step. One must be very careful while answering this question. Why?

Because here one must neither overestimate or underestimate the requirement. 

In case of overestimation, burden to build retirement corpus will be too high. 

In case of underestimation, the retirement corpus will be too lean to generate the required income. 

So how to approach this question? Take a hint of how Raj has answered this question for himself. Take a clue from here, and do the same for yourself. 

How Raj estimated his post retirement expenses?

He created a break-up of his total expenses into 6 heads, and quantified each one of them as shown below: 

#1.1. Home Management Expenses

Utility bills, foods, maintenance etc: Rs.4.5 Lakhs / Annum.

#1.2. Vacation Expenses

Money required for managing annual vacations: Rs.0.5 Lakhs / Annum.

#1.3. Health Care

In old age the cost of managing health is high: Rs.1.0 Lakhs / Annum.

#1.4. Income Tax Payment

Money to be paid to the government as income tax: Rs.1.5 Lakhs.

#1.5. Emergency Expenses

Money required to handle emergencies: Rs.1.5 Lakhs.

#1.6. Inflation Adjustor

Money that must be added back to the retirement fund to negate the effect of inflation: Rs.1.5 Lakhs.

Total Expense

Total annual expense after retirement (sum of #.1 to #1.6): Rs.10.5 Lakhs/Year.

So what Raj now know is a very important number. Why it is important?

Because this is the income that Raj’s retirement corpus must generate each year, if Raj retires today. What does it mean? 

The size of retirement corpus must be big enough to generate a minimum of Rs.10.5 Lakhs per annum. 

What shall be the size of retirement corpus? Let’s read further…

#2. What shall be the size of retirement fund?

How much money is enough to retire in India -3

What Raj knows now is that, his annual expense requirement post retirement will be Rs.10.5 Lakhs per annum. 

To meet this expense requirement, Raj’s retirement income must be more than Rs.10.5 lakhs per year. 

But from where 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:

How much money is enough to retire in India -4

Important points to note in the above formula:

  • Size of Corpus: Rs.1.5 Crore. 
  • Investment Yield: 7% p.a.

What does these values mean?

Size of Corpus: The size of corpus indicated here is Rs.1.5 Crore. What does it mean?

It means, to generate Rs.10.5 lakhs returns per annum, the investment amount necessary will be Rs.1.5 Core. 

Raj must have Rs.1.5 Crore today to start generating Rs.10.5 lakhs per annum, after 12 months from now. 

Investment yield: The investment yield shown here is 7% p.a. What does it mean?

Suppose, Raj decides to invest his retirement corpus (Rs.1.5 Core) in a monthly income plan.

What is a monthly income plan (MIP)? It is an investment options which will generate a steady monthly returns.

This MIP must give a minimum returns of 7% p.a., to yield an annual income of Rs.10.5 lakhs per year. 

How much money is enough to retire in India - 1

So now we know the size of corpus, and required investment returns. Now we must adjust the value (size of corpus) for inflation. Why?

Let’s read more…

#3. Adjust for inflation…

What to adjust for inflation? The size of retirement corpus. Why? Because Raj is not retiring today. He will retire only after 20 years. 

But why Raj is not retiring today? Because he does not have Rs.1.5 Crore as his retirement corpus. 

Hence he has given himself 20 years time to build the retirement corpus. 

But there is a problem. Rs.1.5 Core is the size of Retirement corpus if Raj retires today.

If Raj is retiring after 20 years, his Retirement corpus will not be the same. It will increase. Why? Due to inflation. 

How much it will increase? We can use this formula:[Assuming average inflation rate for next 20 years: 6% p.a.]

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. (Rs.5.0 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 (Rs.5.0 Crore). 

Yes, this is a challenge. It’s a tough race against inflation. Unfortunately there is no way we can do anything about inflation. So we have to live with it. 

But what best a common man can do?

#4. Look towards equity…

For a common man, the best bet against inflation are the following:

  1. Save as much as possible. 
  2. Start investing early. 
  3. Invest in equity based mutual funds. 
  4. Stay invested for long term.

Equity will be Raj’s Saviour. How? Because equity can multiply ones investment faster.

But there are some control points which must be followed with equity investment. What are they?

#4.1. A person who does not have knowledge of equity, must invest in it through mutual funds.

#4.2. The investor must choose a good mutual fund, and stay invested for long term.

On an average, a good equity based mutual fund can yield close to 15-16% returns per annum in long term

These numbers will help Raj to build even a sizeable retirement corpus like Rs.5.0 core (in 20 years). How?

Let’s see what Raj will have to do…

#5. Start a SIP in diversified equity fund…

First step for Raj will be to use any simple investment calculator. One such calculator that I have coded is here

I have use this calculator for Raj. The results are like this:

What Raj will get from using this calculator?

He will know, how much he must invest per month in equity SIP to build a corpus of Rs.5.0 Crore in 20 years. 

As I have already done the calculator for Raj, the result is this:

Raj must invest Rs.28,000 per month to build a retirement corpus of approx. Rs.5.0 Crore in 20 years. 

Summing it all up…

Raj wanted to know how much money will be enough for him to retire in India? 

To get an answer to this question, he started with expense calculation. He understood that, if he wants to retire today, his annual expense requirement will be Rs.10.5 lakhs per annum. 

Hence, he realised that his retirement corpus must be big enough to generate an annual income of Rs.10.5 lakhs. 

To arrive at the size of retirement corpus required, he used a formula (shown above). His retirement fund must be Rs.1.5 Crore. 

But he figured out that he does not have Rs.1.5 Crore as on today. He had another 20 years before he could retire from his job. 

In these 20 years, Raj must build his retirement corpus. But inflation will take its toll in these 20 years. It will inflate the retirement corpus size from Rs.1.5 Crore to Rs.4.85 Crore. 

Hence to meet the needs of retirement corpus, and also negate the effect of inflation, Raj decided to invest his savings in equity based mutual funds (SIP). 

But how much Raj must invest in SIP each month? He used an investment calculator (shown above) to figure this out. 

Raj must continue his SIP for 20 years to build a required investment corpus. 

Know more about where to invest retirement corpus in India

Final Words…

The corpus of Rs.5.0 Core will continue to generate income for Raj till his lifetime and beyond. 

The invested money (Rs.5.0 Crore – retirement corpus) is good enough to generate the required income, “without consuming the principal amount“.

You can also get your investment answers using MS Excel. How? Read this.

Hi. I’m Mani, I’m an Engineering graduate who in pursuit of financial independence, has converted into a full time blogger. After working in the corporate world for almost 16+ years, I bid it adieu....read more

Further Reading

Disclaimer: None of the articles, products etc should not be treated as investment advice. All types of content provided here are for casual reference and for informational purposes only. It should not be considered financial advice. You should consult with your professional expert before application of any information provided here.

4 Comments

  1. 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.

Leave a Reply

Your email address will not be published.


*