Well there is no real Indian rule of 15, but I have just taken the American Rule of 25 and adapted to Indian conditions…

What is the American Rule of 25?

Well if you need an income of 100,000 a year and you are not worried too much about the rate of inflation POST RETIREMENT…then you need to have 25 times your requirement as a retirement corpus. This means you need 25 lakhs as retirement corpus – this is the American rule.

This is because if you keep 25,00,000 in some instrument, you will get a 4% return – and thus your income target of Rs. 100,000 will be met. Of course you can argue that going forward you can withdraw from your capital…and thus provide for inflation too.

Now come to the Indian scenario. YOU NEED TO BE WORRIED ABOUT INFLATION. Not because it is high, but because it is persistent. And I have tracked one persons expenses since 1968 till today, and 8% inflation is a sure shot assumption to make. I am not saying that the next 30 years will see a rock steady 8% inflation, but I am saying being prepared for 8% is smarter than being prepared for 6% and finding it at 8%.

So how much do you need to have as a corpus? I have often grappled with this question and keep popping it up to many people…and am not sure I have a surefire answer for this. Here is another attempt…

The earlier generation did not live too long, had many children and the real estate that they bought appreciated wildly.

– the generation born in the 1960s may be retiring now or will retire in the next 10 years…

– you have one or maximum 2 children

– the appreciation in your real estate will at best be muted, so selling in Mumbai and settling down in the ‘village’ is perhaps not going to happen.

– you may retire at 55 and live to the age of 89

– no point in shrieking that you want to die at 70. Nice thought, but may not happen

So you need to have say 15 years in retirement – then you need about 15 times your annual expenses (at the time of retirement) as your corpus.

HOWEVER, if you need to provide for inflation (which is a MUST), your spouse is 5 years younger to you, and you think you will live for 30 years in retirement (my family has people who have lived longer in pension than on salary) you may need to have 35 times your annual expense. So if your annual expenses at age 50 is Rs. 400,000, let us assume it is Rs. 800,000 at the time you turn 60, you will need about Rs. 2.64 crores.

Now go about creating it!!

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  1. Subra: 35 or 40 time of expenses (at age of 55 or 50) as retirement corpus depending upon whether you retire at 55 or 50 (5 years added for spouse is a good way to project. I believe the idea is to manage the inflation at 8% with the Corpus built and live the life. However if there is a need for white goods, car, medical needs then it is better to have a contingency fund to be in safer side.

    Any thoughts on this approach? as I personally notice many retired people with decent corpus are in big worry when they take into white goods, house keeping assistance, automobile etc. replacements and maintenance

  2. I did not get following point.
    – the appreciation in your real estate will at best be muted, so selling in Mumbai and settling down in the ‘village’ is perhaps not going to happen.

    Also, expense of 4 lac per annum is too high for middle class retired family. If the person has indulged in such overindulgence then the person must be having corpus of 2.64 Crores. 🙂

  3. Probably there is a minor error in calculation – the person with annual expense of Rs 8 lacs and expecting to live for another 30 years and spouse 5 years younger will need Rs 2.8 Cr (=35 x 8 lacs). Or, may be I did not understand the formula to arrive at the required retirement corpus. If so, would greatly appreciate clarification.

  4. This is probably one of the questions that I have been trying to get a heads up on…
    At age 50 – probably the children would not have got married off. Those expenses are to be factored in, including educational expenses.
    Also Subra, can u hazard a guess on what this number would be for a 40 year old?

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