While I wrote a post about how to calculate retirement corpus a while back with detailed excels and steps, a lot of people since then have told me that it is a bit difficult to understand the methodology and assumptions for someone who is new to early retirement or financial independence. Hence, in this post I would try to explain, using hypothetical examples, how much you need to retire. I will divide the post in two halves. We would first assume a corpus and back calculate to figure out if it is sufficient. As we go along doing this, I shall talk about different things you need to be mindful about. In the end, I shall talk about how to figure out how much to retire.

Remember, the how much to retire figure I will calculate will be a bit simplistic as I want to leave out some complex assumption and make this easy to understand. Be rest assured, the amount you calculate would be on a slightly higher side. Additionally, I will provide link to my other post which has the excels with all the formulas that you can use to calculate a much more accurate amount.

**First half of how much to retire – is Rs. 1 crore enough?**

**Step 1 –** **How much is enough?**

How much do you think is enough to retire? Is Rs. 1 crore enough to retire or is Rs. 5 crore enough to retire? Some people have given a thumb rule that says you must have saved 8 times of what your annual salary is at the time you retire. Some say you must save 25% of your monthly income to generate enough retirement corpus. And theories go on and on. What these theories focus on is saving. However, that is an incorrect thing to do. A beggar would be okay to retire if he/she has Rs. 1 crore but a Managing Director of a multinational might not. The difference here is expenses of both these people. And that is the core of retirement planning: expenses.

However, more on expenses later. First let us take a hypothetical retirement corpus and check if that is enough. Let us assume that Rs. 1 crore is enough to retire in India. Take a piece of paper and write down the following:

*Retirement corpus = Rs. 1 crore*

**Step 2 – How long will you live post retirement and retirement period?**

Okay, I know this is a touchy topic and no one can tell how long would they live. But when we are talking about future, we have to take certain assumptions. Good thing is, since we are planning we can take best case, average case and worst case scenario. While the worst case in actual life is that someone dies too early, worst case in case of retirement planning is if someone has a really long life, like live beyond 100 years. Because then one needs to save more for all those years. The life expectancy has been going up and nowadays one can easily expect to live till 80 years of age.

Hence, the next step is to calculate your retirement period. Write down the following on the piece of paper:

*Retirement period = Life expectancy – retirement age*

Let’s say the retirement age is 40 and life expectance is 80. Hence, retirement period = 80 – 40 = 40 years.

**Step 3 – How much will you earn from retirement corpus?**

Life would have been much simpler if there was no inflation. Prices would have stayed the same and you could fix your expenses. Unfortunately, that is not the case. If interest income today is enough to cover your expenses, it might not be able to cover them tomorrow even if expense items remain the same. Hence, you should always adjust your post-tax return with inflation to figure out if the interest income will cover expenses.

Inflation in India could be assumed at around 6-7% for at least 20 years from now. Hence, it is safe to invest in instrument that will give you 8% post-tax return.

Let us see how much interest income can you spend in first year after retirement, if the inflation rate is assumed to be 8%, retirement period = 40 years and retirement corpus = Rs. 1 crore.

** You can spend Rs. 2.7 lakhs. Don’t worry about the calculations, we will do all that when we determine how much to retire in second half of the article.** If this amount is enough to cover your expenses in year 1 of retirement, then everything should be fine. Because, for subsequent years the calculation takes care of inflation.

But do you think **Rs. 2.7 lakhs per year or Rs. 22,500 per month** will be enough? Also, note that you are not retiring today (most likely). Hence Rs. 2.7 lakh if, let’s say, you retire 10 years from now would have even less value. Why, you ask? Remember, our number 1 nemesis : Inflation.

You should write down the next line on the piece of paper as:

*Monthly spend in first year of retirement = Rs. 22,500*

**Step 4 – How much do you spend?**

Since inflation will reduce the value of Rs. 2.7 lakhs/annum or Rs. 22,500 per month, we should look at how much is that value of Rs. 22,500 in todays terms. Let me try to explain it in simple terms. What you are able to buy in Rs. 10 today, you will be able to buy it for Rs. 22 in 10 years if inflation is 8%. Hence, Rs. 22 ten years from now is equal to Rs. 10 today in terms of value.

Suppose, your plan is to retire in the next 15 years. Which means that the value of Rs. 22,500 in todays terms is equivalent to spending Rs. 7092 today.

As next step, figure out your monthly expenses today. My post on how you can retire early talks about how to track and reduce expenses. You may want to read it to figure out your monthly expenses. But for argument sake, let us assume your current monthly expenses to be Rs. 30,000.

As you can see, Rs. 22,500 fifteen years from now would only cover Rs. 7092 of your expenses today and your expenses today are Rs. 30,000. Hence, Rs. 1 crore is clearly not enough. Ideally the difference between Retirement income today (i.e. Rs. 7092 in this case) – present expense (i.e. Rs. 30,000 in this case) should be a high positive number to be on the safe side.

**Second half of how much to retire – how to find retirement amount?**

**Step 1: Estimate your retirement period**

This is the same that we did above in first half.

*Retirement period (in months) = (Life expectancy – retirement age*)*12

You may want to add a buffer of 3-5 years or 36-60 months to retirement period for safety sake.

**Step 2: Find out today’s expenses**

You can use any expense tracker app or refer to my post on how can you retire early and read about tracking your expenses. Only after you have figured out today’s expenses proceed to the next step.

**Step 3: Project future expenses**

When you retire, there are a few expenses that will go away and a few new expenses that will come. While you may not be able to accurately predict these two things, but it is a good idea to identify as much as we can.

Hence, identify the following two expenses:

- Expenses that might go away
- New expenses that might get introduced

#### 1. **Expenses that might go away:**

Following expenses most likely will go away, but you should figure out which ones will for you. You may want to add to this list if you think there are other expenses that might go away.

- House rent
- Daily travel
- Office related purchases like clothes
- Car maintenance (not completely but some part of it)

You should estimate the expense value basis current cost of these expenses (we will project future value later in step 4).

#### 2. **New expenses that might get introduced**

Following expenses might get added. If you think some other expense might be added, feel free to add it.

- Healthcare expenses
- Any new hobbies or project you pick up in retirement

You should estimate the expense value basis current cost of these expenses (we will project future value later in step 4).

Now what you need to do is take present expense from step 2, subtract expenses that might go away and add new expenses that might get introduced.

*Required monthly expense in today’s value = Current monthly expense – expenses that might go away + expenses that might get introduced.*

**Step 4: Future value of expenses**

The required expense in today’s value that we have calculated would need to be adjusted to inflation to calculate what it will amount to in the year when you retire.

Suppose you want to retire 15 years from now. And assume inflation to be 8%, then the future value will be:

*Future value of required monthly expense = Monthly expense in today’s value * (1+8%)*15.*

**Step 5: Calculating retirement corpus**

To answer how much to retire question, we need to find how much retirement corpus do you need. Formula is pretty straightforward.

*Retirement corpus = Future value of monthly expense * retirement period in months*

This is how much you need to retire. As I said at the beginning, this corpus is a bit simplistic, but on a safer side. If you need a more accurate model, read my post on how much do you need to retire and download the two excel files. The post also has steps on how to use these excel files. And that is it friends. Do let me know, if you liked/disliked the post or anything you didn’t understand in comments below.