“Dikra, I used to earn a salary of Rs. 400 per month in the 60’s and we used to still merrily save towards the end of the month. Earning 4 digits was what actors used to earn. Now, even an income of Rs. 25,000 per month isn’t sustainable”, feverishly said one of my clients. This concern is echoed by many individuals who are already retired or getting close to retirement. One of the most frequent questions I’m asked, is how much money is enough to retire? I couldn’t respond with a definitive figure. For someone who retires today, Rs. 2 to Rs. 3 Crores is a decent sum but for someone who would retire 20 years down the line, even Rs. 5 crores may not be enough. This is all thanks to the curse of inflation. With every passing year, due to inflation, retirement burden gets costlier.
The ‘Purchasing Power Of Rupee’ reduces over time due to inflation. Rs. 1 crore, 20 years back, was worth much more than it is today. Rs. 5 Crore of 2016 is equivalent to Rs. 1 crore of 1995. Over the last twenty years, the purchasing power of the Indian Rupee has gone down to a fifth! Don’t blame the Rupee, the culprit is inflation and it is inflicted on all currencies. Even the Dollar and Euro pass through the same. It is a mammoth task for us to fight this negative effect of inflation.
Hence, before ‘Quantifying The Retirement Fund’, one must adjust it for inflation. Let us do some math. If I were to retire today, I first need to jot down a few expenses like daily expense, vacation, medical and health expense, emergency fund, etc. The figure roughly boils down to Rs. 10.50 lakhs a year without compromising on one’s lifestyle. My retirement corpus should be enough to generate income of Rs. 10.5 Lakhs per year without nibbling into the principle. Hence, if today I invest Rs. 1.55 crore into an instrument earning me 7% per annum then it will generate me an income of more than Rs. 10.5 lakhs/year.
Before we finalize the retirement corpus, we must adjust it for inflation. If one plans to retire after 20 years, the required fund shall be adjusted for average inflation for next 20 years. It is estimated that in future (in next 20 years) average inflation in India will be around 6% or lower. At this rate of inflation, Rs. 5 crore of then, will be equivalent to Rs. 1.55 crore of today. It means if we have Rs 1.55 crore today, it will be same as having Rs. 5 crore, 20 years from now. So, if Rs. 1.55 crore is enough for my retirement today, it means Rs. 5 crore will be enough after 20 years.
To sum it up, today’s Rs. 1.55 crore will be equivalent to Rs. 5 crore 20 years from now (after adjusting for inflation). So it means, if somebody plans to retire 20 years from now, he/she must build a retirement corpus of Rs. 5 crore in next 20 years.
The earlier you plan your retirement the easier it is to achieve it. Trust me, 20 years down the line you will tell the next generation, “Dikra, I used to earn a salary of Rs. 1 Lakh per month and still save, now even an income of Rs. 3 lakhs isn’t sustainable!”
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