There was a previous post where I had spoken about how to estimate your expenses in retirement? Assuming you have managed to do it at your current prices and then projected it to the first year of retirement, how do you then determine the corpus required for retirement? Well, there are complex calculators available to do this with multiple parameters, but I always prefer a far simpler way for myself and for the people who may seek my advise.
However, before we come to the simple way let us see what many will recommend that you do. It goes like this:-
- Assume inflation rate for your retirement period.
- Divide your corpus into different buckets with different rates of returns.
- Based on these returns calculate the corpus needed for each bucket.
- Add up the corpus derived for all these buckets in order to decide the total corpus.
- Though there are calculators to do this, it is probably far easier to take help from a financial planner.
Why is the calculation of corpus complex? The main issue is that we are dealing with 2 rates namely the Rate of return on the corpus and the inflation in the economy. The difference between these two is the real rate of return. Now the higher the real rate of return, the lower will your corpus need to be. If you have different buckets, each one with a different rate of return the complexity increases more.
The whole issue can be made absurdly simple, however, if we simply take the real rate of return to be zero. In other words you assume your corpus to grow at the same rate as inflation is. Yes, this will mean that you have to look at a slightly higher corpus as compared to a situation where the real rate of return may be 1 or 2 %. However, on the positive side, being this conservative means it is very unlikely you will ever run out of your corpus. With this assumption in place, calculating the retirement corpus required is a piece of cake. You simply multiply the annual expenses in the first year of retirement by the number of years in retirement and you get the corpus. No complex mathematical formulas, no calculators with multiple inputs across tabs in spreadsheets, just something you can pretty much do in your head.
Let me give a sample calculation for my own situation, to illustrate the point.
- Though my annual expenditure today is quite high, I have estimated that 8 lacs per year at current prices is what I will need when I retire.
- My retirement is 8 years away and I have taken inflation to be 7 % in this period.
- In the first year of retirement my annual expenses are likely to be 13.75 lacs.
- Assuming zero real rate of return and a retired life of 25 years, the corpus needed will be 3.43 crores.
- Just for emphasis, this is a very safe figure that will probably let you spend more as time goes by.
This is an example of how personal finance can be made simpler by making certain assumptions that make life simpler and adds safety factor to the calculations. I hope readers will be able to use this to their benefit.