How much money do you need to retire?




How much money do you need to retire?

What do you think when you hear about "retirement"? Usually, we think about doing a 9 to 5 job for 30 years and then retiring when we get old. Retirement is mostly associated with old age. However, one can still choose to retire between 40-45 years of age or maybe even earlier if you have accumulated the right amount of money after considering future financial requirements.

So let's take a hypothetical example:

Ram is a 28-year-old man who is married to Rina and they both have 2 kids, a boy, and a girl. At the moment Ram is satisfied with his lifestyle arrangement and he is planning to retire by the age of 45. He also wants his children to pursue higher education in the future. Simultaneously he intends to save for his daughters' marriage as well. After completing all his responsibilities as a parent, he wants to have a happy and vibrant retirement where he is financially strong and can travel every 3 months.

So here comes the question as to how much does Ram need to accumulate by 45 years of age so that he can fulfill his responsibilities and also carry on the same lifestyle as he did earlier. Here comes the role of budgeting. So first, he will have to account for all his current expenses in order to predict his future financial needs. Refer to the below table for current expenses being incurred and future expenses that may incur.





The current and future expenses are estimated and then adjusted for inflation. Inflation is assumed to be 7% per annum. Now we know that Ram needs to accumulate Rs.1,18,29,762 in a lump sum and needs to have a cash flow of Rs.21,29,357 per year for maintaining his lifestyle. We know that the equity market gives a CAGR(Compounded annual growth rate) of 15% but to be on a safe side let us assume the CAGR to be 12%. Now to have a yearly cash flow of Rs.21,29,357 one will have to accumulate another corpus of Rs.1,77,44,644 (21,29,357/0.12). The health insurance cost is included in the total expenses per year.

So, in total Ram will have to accumulate Rs.2,95,74,407 ( Rs.1,18,29,762 + Rs.1,77,44,644 ) in order to retire at the age of 45 and have a comfortable retirement. Now it may seem that accumulating almost 3 crore is a big task, but you need to invest only Rs.30,000 per month in a SIP which has a yield of 15% per annum to accumulate 3 crores over a period of 18 years. 

Want to know more about SIP: click here

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Thanks for reading!
Please comment on any financial query you had like me to address. I will try to post something worthwhile. 

Coming up Next: What is stoozing and what are the benefits and risk of stoozing?

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