Most of us spend much of our working life chasing a magic number – the sum of money that is enough to retire on. Enough, of course, is a very subjective word. For some, two cars, three drivers, two cooks, a holiday home in Goa and three foreign trips a year are non-negotiable. For others, a simple life in their own home with green spaces and friends nearby is enough.

In this article, we have taken a standard example of a middle-class Indian. We say middle class because India’s official per capita income at market rates is less than Rs 10,000 per month. We have made certain assumptions about how long he will live, how much his corpus will earn after retirement and how much inflation will be. Here they are:

  1. How much inflation will eat into your corpus – 6%

We have assumed an average inflation rate of 6% per annum till our retiree dies. This is higher than the current inflation rate of 5.21% but is in line with India’s historic average inflation rate. Also, inflation tends to be higher in retirement because medical costs typically rise faster than general inflation.

  1.  How much income your corpus will give, after you retire – 8%

We have assumed a growth rate of 8% per annum on your corpus after you retire. In other words, a Rs 1 crore corpus will give you an income of Rs 8 lakh per annum. This is a little higher than current interest rates on instruments such as National Savings Certificates and Post Office Fixed Deposits which you can view here. However, it is in line with longer-term interest rates. Special schemes aimed at senior citizens also offer rates of 8% and higher such as the Senior Citizens Savings Scheme (SCSS) and Pradhan Mantri Vaya Vandana Yojana (PMVVY).

  1. How long will you live in retirement – 28 years

The big unknown with retirement is – how long will it last? India’s average life expectancy is 68.35 years. However many of us will live into our mid-eighties. We would rather die with excess money left over which we can bequeath to our children rather than face old age with little or no income. So it is safer to err on the side of assuming a long retirement. In our model, the retiree lives for  28 years after retirement. So, if he retires at 60, he lives till 88 years, a reasonably long period to consider.

  1. Can you afford to retire if you have Rs 1 crore?

The answer is yes if you can live with an income of Rs 5 lakh per annum. In other words, you can withdraw Rs 5 lakh per year from your corpus every year. But what about inflation? Yes, we have accounted for inflation of 6% in our model. Hence in every year, you can increase your Rs 5 lakh withdrawal by 6%.

  1. Why is your corpus increasing and then decreasing?

Two factors are eating into your corpus – inflation of 6% and your withdrawal of Rs 5 lakh. On the other hand, the corpus is also earning an interest or return of 8%.
In the initial years, the withdrawal amount and inflation rate combined are not big enough to outweigh your 8% return. However as the Rs 5 lakh withdrawal grows with inflation, you are forced to withdraw more than your corpus earns and your corpus starts falling in value until it hits zero.

How long your Rs 1 crore will last

Year Corpus in Rs Income in Rs
1 10000000 500000
2 10300000 530000
3 10594000 561800
4 10879720 595508
5 11154590 631238
6 11415718 669113
7 11659863 709260
8 11883392 751815
9 12082249 796924
10 12251905 844739
11 12387317 895424
12 12482879 949149
13 12532360 1006098
14 12528851 1066464
15 12464695 1130452
16 12331418 1198279
17 12119652 1270176
18 11819049 1346386
19 11418186 1427170
20 10904472 1512800
21 10264030 1603568
22 9481584 1699782
23 8540329 1801769
24 7421787 1909875
25 6105655 2024467
26 4569640 2145935
27 2789276 2274691
28 737726 2411173
29 -1614428 2555843

 

Author
Neil Borate

Neil Borate is Deputy Editor, RupeeIQ. He can be contacted at neil@rupeeiq.com.