How Much Do You Need To Retire?

I have touched upon this point briefly in step 5 of How to Retire Early in 5 Steps, but I thought I should expand a bit on that. Most people suggest the 4% rule, which basically states that if your expenses can be met by withdrawing 4% of your corpus, then that should be the corpus size. For example, if you need Rs. 50,000 per month to meet all your expenses comfortably in your retirement, then your corpus needs to be Rs. 50,000 * 12 / 4% = Rs. 1.5 crores. But does it really work?

For the skeptics, I have created a calculator (at the bottom of this post) that should help ease the anxiety. You will need to fill in some numbers in the calculator. As I always say, use your judgement and best guess for each. Be candid and don’t overestimate or underestimate. The last 3 numbers already have good defaults, and you only need to change them if you know what you are doing.

Monthly expenses in retirement

Write down your anticipated monthly expenses in today’s value after you retire. Note that your retirement expenses may be different from your current expenses. For example, hopefully you have paid your home loan and probably don’t need to service it. May be your kids will be on their own by the time you retire and you don’t have to foot their education bills, etc. Add in any expenses you expect to incur in retirement like vacations etc. For example if you want to take 2 vacations per year and each is expected to cost Rs. 60,000, then, per year that is Rs. 1,20,000. Divide that by 12 and add it to your general expenses per month.

Your age

You know what to do.

Retirement age

When you intend to retire.

Inflation

The inflation rate that you will be comfortable with. Generally 6% should be a good number unless you have some major expenses whose inflation is higher than 6%, for example education or health expenses, in which case go for a higher 7% or 8%. Likewise, if you are in good health and have no high inflation expenses then go for a smaller number like 5% or even 4%. If you are to believe RBI then you should expect a 4% inflation.

Withdrawal rate (example 4% rule)

You can use one of the withdrawal rule that you feel comfortable with. The default 4% rule is a good conservative number. If you want to be even more conservative, go for 3% or even 2%. On the other hand if you fell like you can live like a monk for the rest of the life you can use 5% or 6%.

Investment return

What investment returns do you expect in your retirement. Note that you cannot invest all your corpus in a very volatile small cap mutual fund. Most likely you have some good allocation to debt funds and some equity exposure to beat the inflation. So 10% should be a good number to aim for. If you want to be conservative, go for 9% or even 8%. Finally, if you are a habitual gambler or buy lotteries, try something higher like 12%.

Your monthly expenses when you retire

This will tell you how much your expenses will be at the time of retirement if your current age is different from your retirement age.