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Finding the target retirement corpus

Few days ago, during a conversation with a friend, we talked about retirement. I mentioned that having a target retirement amount helps us to take many financial decisions easily as it eliminates many of the unnecessary choices. Now the question arose, how do we calculate that amount. I could not recall the correct math involved to arrive at my numbers. I gave a rough formulae to do the math. My friend asked chatgpt to calculate it and it gave a number. We both felt it was too low.

I learnt about the retirement goals and how to find the target corpus for the first time in Monika Halan’s podcast - Lets Talk Money (episode, episode). Based on that, I calculated my target retirement corpus. After the call, I went back to my notes on finding my target retirement amount. Here are the steps -

First step, is identifying the monthly expense that we will be having when we retire. This is tricky to calculate, especially when we are away from the city where we plan to retire. There are multiple factors to consider. Here are some things to consider

  • are we planning to have an own house or are we going live in rented house?
  • what would be our recurring Medical and Health costs?
  • House Maintenance Cost
  • Travel expenses like vehicle maintenance, travel tickets, etc
  • Eating out expense and other luxury cost
  • Child Care cost There will be other factors as well that need to be considered. Based on all my needs, let’s assume that I would need ₹1,00,000 per month as expenses. Then, for an year, it would be ₹12,00,000.

Second step is determining the age when we want to retire. We would need this to calculate the inflation-adjusted annual expense. This is also very subjective. Some like to continue till the late years like 75 and some wants to retire as soon as possible like 50. Let’s assume, it would be at 60 years of age is when I am retiring and lets assume my age now is 37 years. Hence, I need to calculate the amount which is equal to ₹12,00,000 after 23 years.

Third step is finding the inflation-adjusted annual expense at the year of retirement. Use an inflation calculator to find that value. Here are some of the example online calculators - SBI, SEBI, Groww that we can use. If we consider the data since 1960, India has seen an average inflation of 7.37% (source: 1, 2, 3). If we consider recent trend, inflation in India is trending to be around 6-7%. In our example, the value of current expenses would be ₹12,00,000 rupees and let’s take our annual inflation rate as 7% and time period would be 23 years. This would give a result of ₹56,88,636 (if 6% is considered then it would be ₹45,83,700). This means, we would need ₹56,88,636 at the age of 60 to meet the same expenses that we used to handle with ₹12,00,000 in the current year.

Fourth step is finding the retirement corpus. One option is multiply the inflated annual expense by 30 magic number. Why 30? you may ask. It derives from 2 things - what would be our yearly Safe Withdrawal Rate during retirement and how is our retirement fund constituted (debt vs equity ratio) in-order to keep growing the corpus. SWR - the percentage you can withdraw annually without depleting your retirement corpus. In the USA, the usual SWR is 4% with the corpus typically split 60-40 between equity and debt ( which is re-balanced towards debt as we age). If we use 4%, then 25 is the multiplier (multiplier = 100/SWR). In India, the recommended SWR is around 3 - 3.5% which roughly translates to 28-33 multiplier. I am taking that middle ground of 30 multiplier which translates to SWR as 3.33%. In our example, we had calculated the inflation-adjusted annual expense as ₹56,88,636, hence the target retirement corpus would be 30x56,88,636 = ₹17,06,59,080. This is just the goal value we should be targeting. Remember money also grows continuously as we save and invest towards this corpus.

If you want to dive deeper into the research behind these numbers, here are some excellent resources: (Claude helped me in doing this research) -

So, to conclude, there are lot of variables that need to be considered in-order to come to the comfortable retirement corpus that suits individual family. The simple formula is

7% inflation-adjusted target annual expense to the retirement age x 30.

Think through the scenarios and consider what applies to you and what does not. In all these calculations, I feel there are 2 things which are under our control - annual expense and periodic saving/investments.

  • I see annual expense is the key as you are directly responsible for it. So, Optimize it. Optimize does not mean being stringent and starve your desires. Rather, analyze and think what are those unnecessary things you are spending on that are not for your or your families satisfaction but for the societal pressure and fear of missing out feelings. Then, eliminate them.
  • Based on your circumstances, think of regularly saving and investing the money for retirement. It can be small and slowly grow as you bring more financial discipline. Think of tracking your expenses, total worth, creating Systematic Investment Plans (SIP) for regular grow-able investments.

To end with, here is a table with variations in different parameters to get the sense of the retirement corpus targeted for 2048 (23 years from now).

Annual Expense Inflation Rate Inflation-Adjusted Annual Expense Magic Number based on SWR (SWR) Target Retirement Corpus
6,00,000 6 22,91,850 26 (3.85%) 5,95,88,100
6,00,000 6 22,91,850 30 (3.33%) 6,87,55,500
6,00,000 7 28,44,318 26 (3.85%) 7,39,52,268
6,00,000 7 28,44,318 30 (3.33%) 8,53,29,540
9,00,000 6 34,37,775 26 (3.85%) 8,93,82,150
9,00,000 6 34,37,775 30 (3.33%) 10,31,33,250
9,00,000 7 42,66,477 26 (3.85%) 11,09,28,402
9,00,000 7 42,66,477 30 (3.33%) 12,79,94,310
12,00,000 6 45,83,700 26 (3.85%) 11,91,76,200
12,00,000 6 45,83,700 30 (3.33%) 13,75,11,000
12,00,000 7 56,88,636 26 (3.85%) 14,79,04,536
12,00,000 7 56,88,636 30 (3.33%) 17,06,59,080