It is one of the most frequently asked questions in ET.com Mutual Fund’s Facebook page: Is my retirement corpus large enough to take care of my retired life? That is why we thought it would be a great idea to do a primer on how to calculate your retirement corpus and how much you need to invest to build it.
To begin with, starting early and investing regularly in an equity mutual fund would definitely help you to build a decent retirement corpus. However, you need to work with the real numbers to get realistic target and invest the right amount in an equity mutual fund scheme in line with your risk profile to build a retirement corpus that would last your your entire life.
Here’s how you can compute your retirement corpus:
Step 1: You need to make a few assumptions like the age at which you would want to retire, life expectancy, rate of return that you will earn from your investment while accumulating your corpus, rate of return on your investments post retirement and inflation rate. You can write these figures in an excel sheet to begin with calculations.
For illustration, we are assuming that your current age is 30 years, expected retirement age is 60 years, life expectancy is 85 years, rate of return during accumulation phase is 14 per cent, rate of return post retirement is 8 per cent and inflation is at 7 per cent (See table below).
From this data, you can calculate the number of years remaining to your retirement, number of years of your life after retirement, and inflation-adjusted returns. Accordingly, time in hand before retirement is 30 years, number of years after retirement is 25 years (85 yrs- 60 yrs) and inflation adjusted returns is 0.93 per cent (((1+rate of return after retirement)/(1+inflation rate))-1)*100.
| Current Age (yrs) | 30 |
| Expected Retirement Age (yrs) | 60 |
| No of years to retirement |
30 |
| Life Expectancy (yrs) | 85 |
| No of years after retirement |
25 |
| Rate of return during accumulation | 14% |
| Rate of return after retirement | 8% |
| inflation rate | 7.00% |
| Inflation adjusted return |
0.93% |
Step 2: The next step is to find out how much money you need every year to take care of your living expenses after your retirement. You can do this by inflating your current annual expense. For example, assuming your current monthly expenses are Rs 60,000 (or Rs 7.2 lakh per year) and annual inflation rate is 7 per cent, you can calculate your annual expense after retirement using the Future Value formula in Excel. Your inflation-adjusted annual expenses at retirement come to around Rs 54.80 lakh.
| Post retirement monthly expenditure (inflation adjusted) | |
| Current annual expense (Rs) | 7,20,000 |
| Inflation rate | 7.00% |
| Expense at Retirement (inflation adjusted) (Rs) |
54,80,824 |
Step 3: Now you are ready to calculate your retirement corpus or the amount you want to accumulate by the time you retire. This sum should be enough to take care of your financial needs for the rest of your life (based on your assumed life expectancy). You can do this by calculating present value of your total expenses for all the years after retirement. You may use Present Value formula in Excel.
For our calculations, we have taken annual expenses post retirement Rs 54.80 lakh (as calculated in the last step), 25 years as the number of years after retirement, and inflation-adjusted return of 0.93 per cent to reach the retirement corpus. We have used inflation-adjusted returns because inflation will be eating your returns throughout your life.
Our required retirement corpus comes to around Rs 12.28 crore .
| Total corpus required | |
| Expense at Retirement (inflation adjusted) (Rs) | 54,80,824 |
| No of years after retirement | 25 |
| Inflation adjusted return | 0.93% |
| Corpus you will need on retirement (Rs) | 12,28,23,871 |
Step 4: Once you have successfully calculated your target corpus, you can proceed to find out how much you need to invest monthly to create the target corpus. On an Excel sheet, you may use PMT Formula to find this out.
You have to divide the interest rate (14 %, rate of retirement during accumulation phase) by 12 and multiply the number of years to retire (30 years) by 12 to calculate the monthly investment.
Well, as per our calculations, you need to invest Rs 22,360 every month in equity mutual funds in line with your risk profile to create the target corpus at the end of 30 years.
| Monthly Savings required to reach corpus | |
| No of years to retirement | 30 |
| Rate of return during accumulation | 14% |
| Corpus you will need on retirement | 1228,23,871 |
| Savings Required (Rs) | 22,360 |
Once you have learnt the calculations, you may play around the figures and assumptions to calculate your desired retirement corpus. You may save this calculator in an excel file and use it whenever you think there is a need to change your retirement plan.
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