A crore isn’t enough to retire

Putting aside money for retirement is not a novel thought. Yet most of us are still clueless on how much investment is enough to see us through retirement. Some of us even imagine that a Rs 1 crore corpus will see us comfortably through retirement. But when you factor in inflation, the actual numbers can take your breath away.

When you’re living out your retirement years by withdrawing from your savings or investments, inflation can rob you of your buying power.

The first step is to calculate how much you will need towards living expenses after retirement, depending on your lifestyle. Let’s say you’re 30 years old, currently drawing an annual income of Rs 10 lakh. What percentage of your income will be enough to cover your living expenses after retirement? A meaningful estimate would be 70-80 per cent of your current income. So, in our example, that makes it Rs 7 lakh a year for expenses after retirement.

INFLATION BECKONS

However, here is where you need to let ‘inflation’ in and brace yourself. Thanks to the eroding power of inflation, the Rs 7 lakh living expenses today will be equal to Rs 66 lakh after 30 years, when you are ready for retirement.

The calculation is fairly simple. At an estimated inflation of 7.8 per cent (10 year average rate of inflation based on the consumer price index), you calculate how much your current expense would have grown to, by the time you retire.

So now you need to build a corpus that will generate Rs 66 lakh a year post your retirement. Factors such as the rate of return on your investments, life expectancy, inflation, and your willingness to spend the entire principal, will all impact your workings significantly.

Let’s assume that you’re able to earn a real rate of return of 5 per cent on your retirement investments (adjusted for inflation) once you do retire. Then, you need a corpus of Rs 9 crore to give you an annuity of Rs 66 lakh for 25 years (if you’re okay with using up your entire principal).

A tweak here or there to your assumptions can make this number look even more staggering. For instance, if you decide that you need 90 per cent of your current income and your life expectancy is 30 years after retirement, the corpus looks even larger at Rs 13 crore.

The key is to ensure a healthy balance in your investments among asset classes on the retirement corpus. While your risk appetite will be low, the return on your investments should be able to beat inflation.

DON’T FORGET STATUTORY SAVINGS

The good news is that some of your statutory savings such as employee public provident fund (EPF) can come in useful to build this retirement corpus. Employee Provident Fund (EPF) is one of the main platforms of savings in India for nearly all people working in the public or private sector.

The current EPF interest stands at 8.5 per cent. Typically, the employee contributes 12 per cent of the basic plus dearness allowance to the EPF account. The employer may make an equal contribution of 12 per cent.

Let’s assume that you draw a basic salary of Rs 4 lakh a year (assuming 40 per cent of your total annual income, which is the rule of thumb used by financial planners). Every year, on an average, you receive 5 per cent salary increment. So your contribution to EPF over 30 years of your working life will be Rs 34 lakh and the employer’s contribution will be Rs 10 lakh. This amount will grow to Rs 1.5 crore at the time of your retirement.

This leaves you to fund the balance of your retirement fund of Rs 7.6 crore. Working backwards from this amount will show how much you need to set aside today to get there tomorrow.

The critical aspect in saving towards retirement is making an inflation-beating return. Do make sure you include investments in a growth asset such as equity, to ensure you beat inflation by a significant margin.