One of the most frequent questions asked by people is how much money do they need for retirement. And if they do not find the right answer, two things happen – they either carry this anxious question in their sub-conscience or they get into denial mode thinking that their savings will ensure smooth retirement somehow. Let us solve this problem once and for all.
How much money do your really need to save for retirement? It depends on number of things.
What is your age?
The sooner you start saving, the lesser money you will have to save relatively. Very few people realize the power of compounding. Just to give you some idea, to save Rs 2 Crore for retirement, you will need to save Rs 1.1L per month if you start saving at 40 years of age. On the other hand, if you start at age 30, you will have to save 71K per month. [Assumptions: retirement at 60 years, inflation at 7%, investment return at 10%]
What are your expenses?
You would not want to alter your lifestyle drastically when you retire. To transition seamlessly, you expense will remain same or grow at the same rate even after retirement. Some expenses, like medical, will probably rise at a faster rate. The more your expenses are, more you will have to save for retirement.
Rate of return and inflation
Needless to say if you can generate more returns on your savings, you will have to save less. In spite of being such a simple concept, unfortunately people do not realize this and continue investing their money in low return instruments like saving account and insurance-linked investment products. These products rarely beat inflation.
Your current savings
Your current savings will compound to a very high number and thus requiring a smaller amount to save every month. Compounding will depend on the rate of return and inflation.
If you do not own a house, you will have to continue renting out a house. This also needs to be accounted in your retirement calculations.