HOW MUCH SHOULD YOU SAVE FOR YOUR RETIREMENT ?

I get many queries on how much to have as retirement corpus and what can be the withdrawal rate every year.

I come across instances where people are losing jobs in their mid forties and this is the question in top of their minds.

Let us say you are 50 years of age and need Rs.1 lakh every month for your expenses.

Having worked for 25 years, let us assume (hope ! ), you’ve repaid home loan and has made enough provision for your kids higher education and marriage. You also have sufficient medical cover and an emergency fund equivalent to 2 years of expenses.

The retirement corpus you aim for need to provide you an income of Rs.12 lakh per annum. What would be the corpus? I would suggest you need at least Rs.2 crores. Having a life expectancy of 80 years, for both you and your spouse, this corpus can be deployed in balanced funds (equity oriented hybrid funds, 65% in equity and 35% in debt). I assume balanced funds are capable of providing 12% returns over next one decade.

If we keep the withdrawal rate at 6%, you would get Rs.1 lakh per month. Why I’m keeping the withdrawal rate at 6%. The inflation is around 6%. So you get a real return of only 6%. If you withdraw more than the real rate, then your capital would start eroding. As capital erodes, your purchasing power would go down. This would affect your quality of living. So you should only withdraw the real rate of return. This would ensure that if both of you or one of you happen to live till 90 or more, still you’ve comfortable money.

If withdrawals include part of capital, at some point you may run out if it, especially if you live long. Not only that many want to leave some assets for the subsequent generations as well. Also it is difficult to even assume what return we would get beyond 10 years. There can be some major emergencies as well. Keeping all these in mind, it is never wise to withdraw part of capital. You should withdraw only real returns.

This also means that if you go for fixed deposits (other than for emergency fund and near term goals), your real returns would almost be zero. So to preserve your purchasing power, you cannot make any withdrawals! This is an impossible situation.So some amount of risk taking is essential unless you’ve tens of crores. Balanced funds are a better option as we are looking at the retirement life which can even be longer than our career span.

If we apply this strict yardstick, most of us are not ready to retire. So please try to develop your knowledge and skills and be employable till you achieve the goals. Early retirement is not easy. It may be possible if you drastically cut down your life style. Since most of us do not prefer this, the only way is to keep developing skills which can be monetised and thereby enhancing the means.

Early retirement is not easy. I’ll let you know when you’re ready.

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