How do you estimate your retirement corpus?

Have you ever wondered how much you would need to retire early? There is no specific formula but accounting for necessary considerations may help.

Abeer Ray
14 Nov 2022
How do you estimate your retirement corpus?

New Delhi: The most important goal in financial planning is retirement. You may be wondering why. It is the most important because your active income stops but your living expenses do not. To generate sufficient income, you must rely on the corpus you have amassed. You can't rely on lenders because there is no such thing as a retirement loan, and you might not want to go with a reverse mortgage.

Retirement usually coincides with hanging up your boots between the ages of 55 and 65. A new trend in which the younger generation wishes to retire early has recently emerged. When people say they want to retire early, they mean they want to be financially independent much sooner than the traditional retirement age. They want to be able to spend their time doing things they enjoy. They want to be in charge of their own lives.

How do you plan your retirement?

A common question is how much money it takes to retire early. The simplest method is to estimate using the below thumb rule.

The most straightforward method is to multiply your yearly expenses by the number of years you expect to live. This assumes that your corpus returns will be equal to the rate of inflation and that your multiple will decrease as your allocation to risky asset classes increases. If someone wants to calculate it mathematically rather than using a rule of thumb, the following assumptions must be made:

Inflation: Consider an inflation rate of five to seven per cent, depending on your lifestyle. If you want to be conservative, set it at seven per cent. These figures are based on the current Consumer Price Index (CPI).

Annual expenses: You must figure out how much money you will spend once you are retired and have no active income. This will depend on where you are staying (costs in Bikaner/Ranchi versus costs in metropolitan cities like Delhi/Mumbai) and other factors such as travel expenses (do you want to travel internationally or domestically, by train or by business class), dining, leisure, health care, child education (if you are retiring early, additional cost for children's education), and so on.

Life expectancy: Life expectancy is increasing due to improved health care, and it would be prudent to have a higher life expectancy. Ideally, one should live a longer life. Depending on your risk tolerance, you can expect to live for 80-100 years.

Health insurance: You must have adequate health insurance to protect your assets from unforeseen expenses. The likelihood of becoming ill in old age is high. When you are young, you should start thinking about health insurance. Do not rely on corporate health insurance until retirement because you may become uninsurable later in life due to illness. It is prudent to obtain personal health insurance that you can keep indefinitely.

Expected year of retirement: This will help you determine how many years you will likely live after retiring and how long it will take to reach your goal.

Tax deduction: You must check for the tax efficiency of the instruments used to build the corpus and the expected returns. It does not make sense if you have not planned your taxes well. Plan your taxes along with your investments so that you do not end up paying more in taxes every year.

Expected returns: Expected returns during the withdrawal stage (these returns may be lower than the accumulation stage, as you move from a riskier asset class to a less risky asset class).

Retirement planning is not all about Maths. Estimating your retirement corpus is all about making the necessary assumptions based on your current financial standing, your potential needs and possibility of retiring as planned.

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