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.
You know what to do.
When you intend to retire.
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%.
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.
You will need this big of a corpus
This will tell you the corpus you will need at retirement.
You will run out of money at this age
Finally, this number will tell you how long your money will last. It stops at 100 years. So if you see 100+ then your money will last for much longer than 100 years. The table below the calculator will tell your expenses and corpus as you age.
With the default values, you will notice that a corpus of 1.5 crore will generate an income of Rs. 50,000 per month in your first year of retirement and increases by 6% every year. Not just that but the corpus keeps growing even as your spending increases year over year. Now, make just one adjustment and change the investment return to 9% instead of the default 10%. Notice that the corpus will run out by the age of 87. Fun right? Also notice that your annual expenses will balloon to Rs. 1 crore per year on your 87th birthday from Rs. 6 lakhs when you are 37. Thank you inflation!
Now that you know how things work, play around with the numbers and see if the 4% rule really works for you.
How Much Do You Need To Retire Calculator
|Anticipated retirement age|
|Withdrawal rate (example 4% rule)|
|Your monthly expenses when you retire|
|You will need this big of a corpus|
|You will run out of money at this age|