Estimating Retirement Expenses – Future Value Concept

This is the mathematical heart of retirement planning. How do we arrive at the "Magic Number" (e.g., ₹5 Crores)? We use the Time Value of Money.

Step 1: Calculate Future Monthly Expense (Post-Retirement)

We first need to know: "What will my ₹50,000 grocery bill cost in 30 years?"

Formula: FV = PV × (1 + r)^n

• PV: Current Expense (e.g., ₹50,000).
• r: Inflation Rate (e.g., 6% = 0.06).
• n: Years to Retire (e.g., 30).

Calculation: 50,000 × (1.06)^30 ≈ ₹ 2,87,000 per month.

Step 2: Estimate Total Corpus (The Nest Egg)

Now, how much lump sum do you need at age 60 to generate ₹2.87 Lakhs/month for 25 years?

This is complex, involving "Real Rate of Return" during retirement. But for simplicity, we use the Rule of 300 (or 25x Rule).

The Simple Rule: 25x Annual Expense

• Annual Expense at 60: 2.87 Lakhs × 12 = ₹ 34.4 Lakhs.
• Corpus Required: 34.4 Lakhs × 25 ≈ ₹ 8.6 Crores.

The 4% Withdrawal Rule (Trinity Study)

A famous rule in finance says:

"If you withdraw 4% of your corpus in the first year of retirement, and then adjust that amount for inflation every year, your money should last for 30 years."

• If you need ₹12 Lakhs/year.
• Corpus needed = 12 Lakhs / 4% = 12 Lakhs × 25 = ₹ 3 Crores.

Calculation Example

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Factors reducing the Corpus

You might not need exactly replacement of 100% income:

1. No EMI: Home loan usually ends at 60.
2. No Savings: You stop efficient saving (SIPs) at 60.
3. No Commute: Travel to office costs ₹0.

So, we usually take 70-80% of the calculated expense.

Summary

• Future Value: The cost of living will multiply by 5x-6x over 30 years.
• Corpus: The lump sum needed at Day 1 of retirement.
• Withdrawal Rate: A safe rate is 4-5% per year to ensure money lasts.

Quiz Time! 🎯

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Next Chapter: Retirement Plans in India (NPS/EPF)! 🇮🇳