The million Dollar question of retirement

One of the great imponderables in the personal finance space is the question – how much do you need in retirement? There are several ways which are commonly used to arrive at an answer. In the US context, one figure that many planners throw around is 1 million Dollars, provided you have your own house. Of late, I am seeing a lot of people in India suggesting this figure for retirement in India also.

Now, in something like a retirement corpus, the more is always the merrier. As such, there is absolutely no problem in investing more for retirement, in fact it should really be a goal to invest as much as you can. However, two aspects are critical to examine in terms of how this figure may not be a good thing. Firstly, many investors will be hard pressed to invest beyond their means to arrive at such a corpus, thereby creating a situation where they have to compromise on living a good life today. Secondly, while a focus on saving and investing for this amount can be worthwhile, it will seriously limit any risk taking ability of the investor, thus limiting oneself in many cases to a job or career that one may not be overly excited about.

My principal objection to the above figure is that it is in another currency. So while the $ was at 50, the figure was 5 crores and today it is at 6.7 crores etc. This can be seen as a good hedge for our inflation but there are obviously far better ways to address that. Also, it is not a good idea in general, to have a moving goal post. Now, let us come down to what an amount of 1 M $ will mean for retirement corpus in real terms:-

  • Let us assume a corpus of 6.7 crores, zero real rate of return and 30 years of retired life for which you need income.
  • The amount you can theoretically spend each year will then be about 22 lacs. Note that this is in current prices.
  • I am sure there are some people who have an expense of 22 lacs a year today, but it will be safe to say that their numbers are minuscule.
  • If you assume an annual expense of 10 lacs then the corpus comes to 3 crores, which is less than half of the 1 M $ figure.
  • If the real rate of return is 2 % then you will need much less than 3 crores.

The reality is most of us spend far less than 10 lacs a year, exclusive of accommodation expenses. So a far better way will be to estimate your monthly expenses at retirement, bump it up by a few percentage points and arrive at a corpus. As an example, if you are spending 7 lacs per year today, you can inflate it by 15% and look at 8 lacs as your annual expenditure. Remember, it is not the amount you are spending at your peak level of expenditure, it is the amount you will need when you are retired.

To take my personal example, for the past few years my annual expenses have actually been at the range of 20 lacs plus. However, a large part of this is due to the educational expenses for my children. When I do retire completely, these expenses will not be there and my estimate of 8 lacs annually should hold quite comfortably. As such, while I am probably going to be quite close to the US figure, I do not think I need so much.

Do not get swayed by fads that do not have any substantive basis. Your situation is unique – look at it and deal with it accordingly.

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