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D.Muthukrishnan (Muthu), Certified Financial Planner- Personal Financial Advisor

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How much you should save for retirement?

Posted by Muthu on September 5, 2016

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.

4 Responses to “How much you should save for retirement?”

  1. Was wondering about this a long time. But children’s expenses cannot be determined beforehand. My child I have provided for in Indian Rupees for an Indian education but she’s thinking of a foreign degree which costs 16 times as much.Still grappling with the situation.

  2. Amit said

    You are right. My Father retired from central government service during 3rd pay commission in 1981.Though he had a pension linked with DA increase. he was partially saved. But with every bodies consent he sold his house and shifted to my house in 2003. Money generated by selling the house was kept in FD..So he could generate extra cash by interest. he lived till 93 but never taken money from me and my brother. I also found that after 88 his expenses shoot up because of medical & maintaining supporting attendant, cook etc. It is very important to plan retirement fund considering age up to at least 90.

  3. Sathia said

    Return on Investment (ROI) from Fixed Deposit /Term Deposit is near zero ( post inflation adjustment). Therefore, the ROI the debt instruments/ Debt based MF’s also should be near zero – Please share thoughts and opinion

  4. Girish Sidana said

    I disagree with the author on erosion of capital. There is no harm in capital getting eroded. In my opinion this is over planning if you do not want your capital to be ever consumed.

    Why do you say that it is difficult to assume the return after 10 years. All proponents of equity investments (including you) give examples of 10-20-30 years, then why it is difficult to assume returns after 10 years?

    It is easy to say that remain employable till long but in the technology era, the young are more employable. As you age your capacity to learn new things reduce. One may not have a choice but to retire in late 40s or early 50s. Every aspect of business is getting more and more dependent on technology and thus reducing the importance of experience. This makes young to have an edge over experienced slightly older people.

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