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I'm 40, How Much Do I Need to Retire at 50 with 50k/month Expenses?

Ramalingam Kalirajan |6965 Answers |Ask -Follow

Mutual Funds, Financial Planning Expert - Answered on Nov 04, 2024

Ramalingam Kalirajan has over 23 years of experience in mutual funds and financial planning.
He has an MBA in finance from the University of Madras and is a certified financial planner.
He is the director and chief financial planner at Holistic Investment, a Chennai-based firm that offers financial planning and wealth management advice.... more

Asked by Anonymous - Nov 03, 2024Hindi

Hello Sunil Sir. Can you pls tell me how to calculate my retirement corpus? I am 40 years old and plan to retire at the age of 50. At present, I need 50K per month for my expenses and I expect to stay alive till the age of 80. Also, I prefer having my retirement corpus in FD and Post Office deposits (I find MFs and Stock Markets risky). Pls provide detailed calculations for me to understand and improvise at my end. I look forward to your kind response. Thank You.

Ans: Planning a retirement corpus at 40 with a retirement age of 50 is ambitious. You have a clear view of your needs, which is commendable. To plan effectively, it’s essential to understand the value of your current expenses at the time you retire and then sustain them for a long retirement period.

Current Monthly Expenses: Rs 50,000

Expected Retirement Age: 50 years

Life Expectancy: 80 years

This implies that your retirement corpus should last for 30 years. Given inflation and your preference for conservative investment options, you will need to plan for a larger corpus to ensure adequate income in retirement.

Step 1: Adjusting for Inflation

Inflation is crucial in retirement planning. Over 10 years, inflation will increase your expenses significantly.

Assumed Inflation Rate: Typically, 6-7% is assumed.

Future Monthly Expense: With inflation, your current Rs 50,000 might grow to Rs 1 lakh or more by retirement age.

Annual Expense Post-Retirement: Your new monthly expense will help determine annual needs post-retirement.

Since inflation will gradually increase, your corpus must be large enough to cover these future expenses.

Step 2: Calculating Total Corpus Requirement

To sustain a steady income in retirement, we need to calculate the corpus amount that can generate this income, adjusted for inflation. Since you prefer FD and Post Office Deposits, we’ll assume a conservative return rate.

Estimated Returns: Bank FDs and Post Office deposits typically yield 6-7% returns, which is moderate and stable.

Drawdown Plan: You will need to draw from this corpus every month to meet expenses without exhausting it prematurely.

Given these conservative returns, your corpus will need to be substantial. To get the estimated figure, calculate it based on generating Rs 1 lakh per month for 30 years.

Step 3: Accounting for Conservative Returns

Investments in FDs and Post Office Deposits will likely yield returns similar to inflation, meaning your purchasing power might erode over time. A larger corpus will help cushion against this risk.

Corpus Estimate: To provide Rs 1 lakh per month, plan for a corpus ranging between Rs 3 crore and Rs 4 crore.

Step 4: Building Your Corpus in the Next 10 Years

Since you’re 40, you have 10 years to accumulate this corpus. Saving in conservative options like FDs alone may not help you reach this goal comfortably. Here’s a structured approach:

Primary Allocation: Consider investing in high-interest Post Office schemes and senior savings schemes after retirement, as they offer stable returns.

Supplementary Allocation: SIPs in balanced funds or low-volatility debt funds could provide higher returns over 10 years, despite your risk aversion. Regular mutual funds, managed by qualified professionals, can offer an optimal balance of safety and returns.

Step 5: Emergency and Liquidity Planning

For a secure retirement, it’s also essential to have liquid funds to meet any unforeseen expenses. Keeping 10-15% of your retirement corpus in liquid funds, like savings accounts or short-term FDs, ensures easy access.

Step 6: Health and Insurance Considerations

Your retirement corpus should also factor in healthcare needs, as medical costs typically rise with age. Maintaining a health insurance policy can help offset any major medical expenses, preserving your retirement funds.

Final Insights

Planning for a 30-year retirement requires diligence and a diversified approach. While FDs and Post Office schemes are reliable, consider combining them with well-managed mutual funds for a more comprehensive solution. This will help you accumulate a corpus large enough to provide for your needs while maintaining flexibility.

Best Regards,

K. Ramalingam, MBA, CFP
Chief Financial Planner
www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment

DISCLAIMER: The content of this post by the expert is the personal view of the rediffGURU. Users are advised to pursue the information provided by the rediffGURU only as a source of information to be as a point of reference and to rely on their own judgement when making a decision.