You may have read my post on top 3 items to help decide retirement corpus. This post is a detailed explanation of how much money you would need to retire. So, what is the magic number you need to retire early in India?
Short answer: there is none. If you are disappointed, quickly want a rule of thumb and a formula, click here.
Long answer: It depends on the following variables – annual expense and hence savings, return on investment, inflation and lifespan.
The maths is pretty simple, the difficult part is putting in correct assumptions for the above variables + any buffer that you think gives you comfort.
Below are the two excel sheets to find out your retirement corpus. You can download and play with the assumptions to figure out how much would you need to retire early in India. If you think this is too overwhelming, then you can start with my another post on the same topic. If you are just starting your financial independence journey, then that post will be easier to digest as it simplifies the assumptions. But do come back to the excel sheets below for exact computation.
How to determine retirement corpus?
Excel_2 (click to download): Inputs are expected return, inflation rate and retirement corpus (for example, if from Excel_1 you think that retirement year x is what you want to target, then the ending value of the investment from that year is your retirement corpus). Output is the ending value of your investment each year. Till the year this number is positive, is the year till which your retirement corpus should last.
How to use the excel sheets?
First open Excel_1. Default inputs in Excel_1 are:
- Current savings = Rs. 10 Lakh
- How much do you plan to save annually in first year = Rs. 10 Lakh
- Expected increase in amount you plan to save each year = 10%
- Inflation = 7%.
- Expected return = 10%
- Let us come to “What percent of your portfolio will you spend in your first year of retirement?” later
Suppose you are 30 years old and you want to retire by 40. Now let us also look at your expenses today. Suppose, your annual spend is Rs. 3 Lakh. So, in 10 years your expenses would rise to Rs. 5.9 Lakhs, with inflation. Of course, if there is any other expense that you foresee in future that would be big one time expense you should input it in the excel for that year.
Now at the end of 10 years, your investments would be Rs 2.73 Crores. Last part is figuring out “”What percent of your portfolio will you spend in your first year of retirement?”. We know you would need Rs. 5.9 lakh in expense at the end of year 10. Hence, the input percentage here is = 590000/27300000 = 2.16%
Let us open Excel_2 now. Inputs here are:
- Beginning portfolio value = Rs. 2.73 crore (from excel_1)
- Starting spending rate = 2.16% (calculated in the last step in excel_1)
- Annual inflation = 6% (post 10 years, I have considered inflation to be 6%)
- Annual return = 6.8% (This is post-tax return, pre-tax is 8.5%. I have considered that post retirement bulk of your corpus would be shifted to debt rather than risky equity)
You can see that, ending value each year first increases till year 40 (i.e. 40 years after you have taken retirement) and then decreases. It finally gets negative in year 57. Hence, it is safe to say that your retirement corpus will last 56 years after you retire.
You can play with the above two sheets to find out what is the magic number for you. However, before finalising a number that suits you, I strongly recommend you to go through my post on how can I retire early and read the section where I talk about how to reduce your expenses. It will give you a good starting point to figure out what should be the annual expenditure you should target and hence what should be the amount you save.
Review every year
While both the excels are a great tool to start, you should always review them after each year as there may be an unexpected increase in saving or expenditure in a particular year. Hence, you should adjust the variables basis the same.
Bottomline is, if your monthly household income post tax is greater than Rs. 1,00,000 then you should definitely target saving 65% of that if you want to retire in the next 10-12 years. The reason I say income has to be greater than Rs. 1,00,000 is because expecting someone with a take home pay of Rs. 50,000 to save Rs. 32,500 (65%) is not practical, especially if the person lives in a metro and has a family to support. Nonetheless, one should always rationalise the expenses (remember buy what you need not what you want) no matter the income.
Understanding the maths
The maths is pretty easy. The idea is to create a retirement corpus that is big enough so that the post tax interest it generates in an year covers your expense for that year. And it keeps on doing so for your entire lifespan. Remember, your expenses increase at the rate of inflation each year.
All this is fine, but how much do I need to retire early?
If you need a thumb rule, here it is. Most retirement blogs say that the retirement corpus you need to retire today should be roughly 25-30 times your annual expenses today. I would say considering the inflation and rate of returns in India take a factor of 40x. Hence, if your annual expenses today are Rs. 12 lakhs per annum ($17,142), you need roughly Rs. 4 – 4.5 Cr ($571K – $642K) as the retirement corpus today.
Quick formula to calculate the retirement corpus at the time of retirement:
- Number of years to retirement = n.
- Current annual expense = Rs. 6 lakhs (replace with your current annual expense).
- Inflation assumed = 7%
- Multiplication factor = 40X (you can take anything between 25-50)
- Amount required after ‘n’ years to retire = 6 lakhs * (1.07^n) * 40
Update: Some readers have come back and said they don’t need to retire and do nothing. Hence, they can quit their full time job after accumulating much less corpus and then make money from their hobbies and/or part-time work. First thing first, let me be clear that by early retirement I don’t mean that one should not do any work. That is a terrible idea, people have to do something, that is inherent human nature. On the second part of quitting full time job at far less corpus, yes, of course you can do so. But you would still not be “financially independent”. Because financial independence, by definition, means that you have enough corpus that generates interest amount to cover you for life without a need to earn from any other source. Of course, if there is a work you enjoy and can get paid for it, why not. But the whole point is that you should “retire” from working for money. See my detailed post on why early retirement is not the same as not working.
You may want to read why I choose to take a factor of 40x vs 25x.