Ideal savings needed for retirement

[Shivaji]

Your opinion on savings you needed to get yourself financially free.
Ideal savings and investment that you need to have in life so that you can do things that you want to do or should I say. To live your life not to spend your life.
I'm not taking in consideration the lavish life after completion of that funds.
Let say after this x amount you don't need to do your regular job you can work on things that makes you happy irrespective of the money factor involved.

 

[Mayank]

It is a very subjective question.
I have aggregated the information from various source and will try to write here.

As a thumb rule:

33x of your current Annual Income

The more general rule is:

Corpus_Size = (((Monthly_Expense * 12) * 100) / 7)

Steps​

• Estimate Monthly Expense
• Estimate Size of Corpus
  A simple equation to calculate the corpus size is:

Courpus_Size = (Annual_Income_Requirement / Investment_Yield)

The intuition behind this is that the retirement corpus must be big enough to generate atleast a fixed an annual income.

Few things to Remember:​

• Since the user is not having a steady source of income, his risk appetite is low, hence keeping expected Annual Returns to 7%.
• The above equation doesn't take inflation into account, which means the result is under big assumption that the users MONTHLY EXPENDITURE WON'T INCREASE, which is generally not the case.

Example​

Let's assume that the expense is 1 Lakh Per Month , so placing placing the value 1,00,000 as Monthly_Expense in the equation,

Corpus_Size = (((1,00,000 * 12) * 100) / 7)
Corpus_Size = ((12,00,000 * 100) / 7)
Corpus_Size = (12,00,00,000 / 7)
Corpus_Size = 17142857.14285714
Corpus_Size = 1.72 Crore
Hence, the corpus size should be 1.72 Crore .

Adjust for Inflation​

What-if a person will retire after X number of years (X could be 15 or 20)?​

If this is the case, then the required corpus will be much higher.

Corpus(n ) = Corpus(t) * (1 + inflation_rate)^n
Corpus(n ): Corpus required after n years.
Corpus(t): Current required today.
inflation_rate: The average inflation rate.

Example​

Let's assume the you want to retire after 20 years and the average inflation is 6% p.a,

Corpus(20) = 1.72 Cr * (1+6)^20
Corpus(20) = 1.72 + (1.06)^20
Corpus(20) = 1.72 + 3.21
Corpus(20) = 4.93 Crore
So, we can say that, this person must have a corpus size of approx. 5 Cr to meet his needs after retirement.


Hope you got the gist of it. You can now use it to calculate how much money you need for retirement.

 

[ShavirB]

Hey @Mayank , thanks for breaking it down. Had few doubts on the assumptions

1) What is the rate of growth you've assumed for the final corpus? (It'll earn a min of 3-4% even if kept in Savings Account)
2) How have you assumed 33x of annual income? Generally, the practise is to assume at 20-25X of the income assuming a return rate of 4-5%

 

[Mayank]

Hey @Mayank , thanks for breaking it down. Had few doubts on the assumptions

1) What is the rate of growth you've assumed for the final corpus? (It'll earn a min of 3-4% even if kept in Savings Account)
2) How have you assumed 33x of annual income? Generally, the practise is to assume at 20-25X of the income assuming a return rate of 4-5%

1. I'm a assuming around 7-8% return coz most investment will be kind of risk free as the allocation in equity will be less and a major chunk will be invested in Gold, Bonds and Debt Funds.
2. See, there is no fix formula for assumption. This was based on the research which I had done. It is always better to target on the higher side, so 33x. 25x also works, but targeting and having more cash is always better.

 

[sagar shimpi]

You can invest in niftybees by sip or by lupsump and later when it reach above 1 lack you can pledge it for extra 5-10% .

 

[Mayank]

Hey @Mayank , thanks for breaking it down. Had few doubts on the assumptions

1) What is the rate of growth you've assumed for the final corpus? (It'll earn a min of 3-4% even if kept in Savings Account)
2) How have you assumed 33x of annual income? Generally, the practise is to assume at 20-25X of the income assuming a return rate of 4-5%

Upon searching on it, I found that the 25x rule was meant for US market and was developed in 90s (when inflation was around 3-4%). Now, for Indians, where we have inflation of near 7%, upon researching, I found that a 33x seems much better.