How much money a person needs at the time of retirement?
Accumulation phase is the earning years of a person’s life, when a person accumulates savings.
Distribution phase is the retirement years, when some of the savings will fund the living expenses.
An issue that bothers most people is the corpus required for a comfortable retired life. This depends inter alia on the following aspects:
- Amount required in each month of retired life
This may be determined either as a percentage of current income, or as a percentage of current expenses. Likely savings in some expenditure (such as travel costs) and likely increases in some other items (such as healthcare costs) need to be considered.
2. Nature of retirement benefits available
Some persons would have the benefit of pension from their employers. The expected pension can be reduced from the amount required in each month.
3. Inflation rate
This varies from year to year. For the purpose of planning, a single long-term rate is to be considered.
4. Number of years to retirement
How many years down the line does the person expect to retire? If current age is 30, and targeted retirement age is 60, then retirement is 30 years away.
5. Number of retirement years to provide for
The retirement should plan for the life-time of both partners – a longer period in case of concerns regarding earning potential of the next generation. The rising life expectancy of people needs to be factored.
6. Likely rate of return on investment of retirement corpus
On retirement, the person may not be able to take too much risk. He needs more of debt investments.
Here is a case study of a person aged 52
Mr. Z, aged 52 years, is working in a leading company. His net savings are Rs 50,000 p.m. Based on salary growth and other factors, he expects this to rise by 20% p.a. till his retirement at age 60. This does not include monthly contributions of Rs 9,000 (Rs 4000 own contribution; Rs 5000 employer contribution) to various funds towards retirement corpus. These are expected to grow by 20% p.a. till retirement. The retirement corpus by the end ofthe year will be Rs 12 lakhs, entirely in debt, which will yield 8% p.a. on average. Besides his own residential house and the retirement corpus, his savings and investments will amountto Rs 50 lakhs by the end of the year, 30% of which will be in equity. He has a practice of investing, at the end of each year, his disposable savings into debt and equity in the ratio of 80:20. In the long run, he expects equity to yield 15% and debt to yield 8.5%. At the end ofage 55, he expects an outflow of funds amounting to Rs 5 lakhs, which he hopes to meet outof annual savings.
He expects inflation of 10% and post-retirement investment return on his portfolio at 11%.
His current expenses are Rs 40,000 per month.
Assume zero date as the end of age 52. Calculations are to be done on annual basis. Ignore
taxation and interest income on savings and contributions during the year.
What is the corpus requirement to ensure that he is able to sustain the same standard of living for 15 years after retirement?
Rs. 14,496,632
i.e. ~ 14 times the annual expenses at the time of retirement at age 60
i.e. ~ 30 times the annual expenses at the time of age 52
What is the corpus requirement to ensure that he is able to sustain the same standard of living for 25 years after retirement?
Rs. 23,122,697
i.e. ~ 22 times the annual expenses at the time of retirement at age 60
i.e. ~ 48 times the annual expenses at the time of age 52