I had asked a question yesterday on the AIFW group – just wanted to check 2 simple numbers namely current annual expenses and the retirement corpus that people would like to have. It was quite interesting to view some of the responses and I wanted to discuss the same in this post.
To start with let me address the issue that many of the respondents have raised – why have I not asked for the time left in years to retire. Well, there is a simple answer to that. I was wanting to see the relationship that people implicitly put between the two parameters of annual expenditure and retirement corpus. As that did not have anything to do with the time left to retire, I had not asked for that data.
Let us now look at the responses:-
- Annual expenditure ranged from 1.8 lacs to 16 lacs
- Retirement corpus desired, ranged from 1 crore to 100 crores.
What is it that one can say about the responses on current annual expenditure? For one, people with lower expenditure are probably at the beginning of their earning life and it is likely that their expenses will increase over the next few years. Similarly, people who are spending 8 lacs and above per year are either having school going children or have some hobby like traveling that costs a fair bit. Over a period of time the expenses of such people are likely to reduce. In general you will see that annual expenditure will start at some figure like 2-3 lacs and keep going up over a period of time till your children are out of college etc. In my own case, when I started working in 1988, my annual expenditure was less than 50000 – had to be so as I did not earn very much more !! In the calendar year 2014, my expenses were about 20 lacs. As I have stated in another post, this included the college fees of children and also a 2 week trip to Australia that came to about 5 lacs. I know this is not representative of my retired state, where my annual expenses will probably be about 8 lacs.
Now, for the purpose of retirement corpus we will need to assume that you have either completed your other financial goals or have some separate arrangement for the same. For example, if I am to look at my retirement corpus today, I will not include expenses related to my son’s graduation, my daughter’s post graduation or their marriages in it. No doubt, these will have to be funded but that is a separate exercise. The retirement corpus has a single minded goal – to take care of the current ( or changed ) lifestyle that you and your spouse want to have for the number of years that you think you are likely to live for.
With the above explained, let us now look at the framework that you can use to arrive at a retirement corpus that will comfortably see you through the number of years in retirement. I am putting this in a very simple sequence of steps – you do not need a calculator just some pen and paper and basic expense data of 2014 and 2015. Note that your age and / or the number of years to retirement is irrelevant – however, you do need to know your life span for the calculation. Here are the steps:-
- From your last annual expenses take out the items that are unlikely to be there at retirement and add ones that are likely to be introduced.
- After you arrive at this normalized annual expenditure, think of the other expenses you may need in your retired life. For example, you may need to replace your car once, go on 2-3 vacations outside India or do something else altogether.
- Now, let us say that you are 40 years old, your annual expenses are 10 lacs and you are likely to live till 80 years. A safe retirement corpus for you will be 40 x 10 lacs or 4 crores.
- If you want to make it super-safe you may want to add another 5 years expenses but that is not needed. Remember that your current annual expenses will probably go down in future so purchases like the car and foreign vacations can well be accounted for that.
That is it in a nutshell – no complex maths, no running around with inflation projections and return expectations etc. This will work quite well for anyone above 30 who has a family. For younger people who are single, you need to inflate your expenditure to the extent it is likely to go up when you do have a family. For most part this will work quite well.
Now, some person who spends 5 lacs today wanted to have a retirement corpus of 20 crores. There is no harm in it, in fact the principle here should be the more the merrier. However, if he is 30 years old and we inflate his expenses by another 3 lacs it comes to 8 lacs for 50 years. Even with such liberal assumptions, he will be needing only about 4 crores.
Calculate your own retirement number using this framework and you will see how different it is from what you may have thought.