If you save Rs 1 crore as retirement corpus, will it last long enough to give you a regular and adequate income till you are alive? If not, will you need Rs 5 crore or Rs 10 crore or even higher? Everyone is looking for a right answer of this question while planning and reviewing their investments.
A financially independent retirement is a dream for most people.
Not just people in their 40s and 50s, a lot of youngsters are also showing a keen interest in becoming financially independent very early in their lives. But most of them have a common problem – having a vague idea of the corpus they require to retire.
Most think that a comfortable retirement means having an extra-large corpus. As a result, they keep trying hard to increase their saving and investment rate and remain in a stressful state of mind.. Are you also one of them? Do you also think you need a big corpus such as Rs 10 crore or even a higher corpus for retirement? Think again. This financial expert thinks otherwise, telling you the amount you need for a financially free retirement.
In a LinkedIn post, Neeraj Chauhan, CEO, The Financial Mall, writes, “A lot of us believe financial freedom means having huge amounts of money — Rs 10 crore, Rs 50 crore, even more.
“But have you ever stopped and asked… Kitna paisa actually chahiye (How much you really need)?”
Financial expert suggests an easy way to find financial freedom number
He gives the formula to calculate your financial freedom number (retirement corpus)
Financial Freedom Number = Your Annual Expenses × 25
He says the multiplier of 25 is based on the 4% withdrawal rate rule, a basic thumb rule in personal finance.
The 4% rule is a retirement rule, suggesting retirees withdraw 4% of their retirement corpus in the first year and adjust that amount for inflation annually. This strategy aims to help a person sustain their retirement corpus for their lifetime no matter how long it is. It will also leave a substantial legacy money to their legal heirs.
Retirement corpus for person with Rs 1 lakh/month expenses
For a person with Rs 1 lakh/month, or Rs 12 lakh/yearly expenses, he says that the retirement corpus required is Rs 3 crore.
Yearly expenses = Rs 12 lakh
To generate that safely forever corpus required= Rs 12 x 25 = Rs 3 crore
So, if your monthly expenses are Rs 50,000 then as per this financial expert you may consider retiring with a corpus of Rs 1.5 crore.
The expert sums up, "So instead of blindly chasing bada amount, start working towards the right amount.
"Because financial freedom is not about being rich, It’s about being free and to live life on your terms."
The expert, however, did not reveal the rate of return on the corpus and for how long the amount can last if a 50-year-old starts withdrawing it.
Calculation test
We tested the possibility of whether an Rs 3 crore corpus can help sustain a 50-year-old person till 80 years of age if they start withdrawing Rs 1 lakh/month and increase the withdrawal by 4% annually for 30 years.
We calculated it at a 7% annualised investment return and 5% inflation. After enjoying inflated adjusted regular income for 30 years, you will still have a corpus of Rs 4.83 crore which can help you to manage your retirement life for many more years. In case you are no longer alive this could be the amount that will be passed on to your legal heir.
Monthly/yearly expenses, rate of return and the inflation rate can create unique situations for individuals. So you need to calculate your retirement corpus according to your situation. This is also not retirement planning advice as it is only for indicative purposes. For your own retirement planning, you can contact a financial advisor.
A financially independent retirement is a dream for most people.
Not just people in their 40s and 50s, a lot of youngsters are also showing a keen interest in becoming financially independent very early in their lives. But most of them have a common problem – having a vague idea of the corpus they require to retire.
Most think that a comfortable retirement means having an extra-large corpus. As a result, they keep trying hard to increase their saving and investment rate and remain in a stressful state of mind.. Are you also one of them? Do you also think you need a big corpus such as Rs 10 crore or even a higher corpus for retirement? Think again. This financial expert thinks otherwise, telling you the amount you need for a financially free retirement.
In a LinkedIn post, Neeraj Chauhan, CEO, The Financial Mall, writes, “A lot of us believe financial freedom means having huge amounts of money — Rs 10 crore, Rs 50 crore, even more.
“But have you ever stopped and asked… Kitna paisa actually chahiye (How much you really need)?”
Financial expert suggests an easy way to find financial freedom number
He gives the formula to calculate your financial freedom number (retirement corpus)
Financial Freedom Number = Your Annual Expenses × 25
He says the multiplier of 25 is based on the 4% withdrawal rate rule, a basic thumb rule in personal finance.
The 4% rule is a retirement rule, suggesting retirees withdraw 4% of their retirement corpus in the first year and adjust that amount for inflation annually. This strategy aims to help a person sustain their retirement corpus for their lifetime no matter how long it is. It will also leave a substantial legacy money to their legal heirs.
Retirement corpus for person with Rs 1 lakh/month expenses
For a person with Rs 1 lakh/month, or Rs 12 lakh/yearly expenses, he says that the retirement corpus required is Rs 3 crore.
Yearly expenses = Rs 12 lakh
To generate that safely forever corpus required= Rs 12 x 25 = Rs 3 crore
So, if your monthly expenses are Rs 50,000 then as per this financial expert you may consider retiring with a corpus of Rs 1.5 crore.
The expert sums up, "So instead of blindly chasing bada amount, start working towards the right amount.
"Because financial freedom is not about being rich, It’s about being free and to live life on your terms."
The expert, however, did not reveal the rate of return on the corpus and for how long the amount can last if a 50-year-old starts withdrawing it.
Calculation test
We tested the possibility of whether an Rs 3 crore corpus can help sustain a 50-year-old person till 80 years of age if they start withdrawing Rs 1 lakh/month and increase the withdrawal by 4% annually for 30 years.
We calculated it at a 7% annualised investment return and 5% inflation. After enjoying inflated adjusted regular income for 30 years, you will still have a corpus of Rs 4.83 crore which can help you to manage your retirement life for many more years. In case you are no longer alive this could be the amount that will be passed on to your legal heir.
Monthly/yearly expenses, rate of return and the inflation rate can create unique situations for individuals. So you need to calculate your retirement corpus according to your situation. This is also not retirement planning advice as it is only for indicative purposes. For your own retirement planning, you can contact a financial advisor.
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