Do it yourself: How to calculate retirement corpus?

There are times when you go to your financial advisor to seek advice and one such thing is knowing your retirement corpus. So what is retirement corpus and why is it important for you to know? Retirement corpus is that amount which you require at the start of retirement, which you would further invest in mutual funds or any other investment avenues, for that matter, based on your risk appetite and withdraw the desired amount periodically to meet your needs. It is important to know your retirement corpus as it will helps you in smoothening the cash flows during your retirement period. So let’s begin.

Before calculating the retirement corpus, there are certain things which you should list down among which some would be facts and some would be assumptions.

1. Your current age.

2. Your retirement age.

3. Your life expectancy (it is an assumption and the average life expectancy in India is 70. However, looking at the advances in the medical field, expect your life expectancy to be around 85)

4. Your current monthly expenses.

5. Expected inflation rate per and post retirement (it is an assumption and 7 per cent is general inflation)

6. Expected rate of return post retirement (it is an assumption and based on your risk profile, this would be the rate of return that you expect after you get retired. Your retirement corpus would grow by this rate).

7. Real rate of return (This would be your inflation adjusted returns)

How to calculate real rate of return?

Let us assume than the expected rate of return is 9 per cent and inflation is 7 per cent. So your real rate of return would be: 

So here your real rate of return is 1.87 per cent.

How to calculate retirement corpus?

Step - I

In step one we will find out how much monthly expenses do you require at your retirement age. The same can be calculated as:

Where,
n is number of years left until retirement

Let’s say your current age is 30, you plan to retire by 60 and your current monthly expenses is Rs. 30,000. So monthly expenses that you require at the time of retirement is:



So you require Rs. 2.28 lakh per month as your expenses. But now there is a catch, there are various expenses such as child’s education post retirement so to discount this ideally it is wise to take 70 per cent of the expenses that we just now calculated. So 70 per cent of it comes to Rs. 1.6 Lakhs. So you would require 1.6 lakhs per month at your age of 60 (retirement age).

Step - II

Now we came to our final step which would give us the retirement corpus that we require to survive post retirement. The retirement corpus can be calculated as:

Where,

PMT is periodic payment amount.

n is number of compounding periods

i is interest rate.

So continuing with the illustration in step one your retirement corpus works out to be:

So your retirement corpus comes to around Rs. 3.82 crore. Remember that while calculating retirement corpus compounding effect is important. If your expenses are monthly and you wish to calculate based on that then even rate of return and number of periods need to be converted to monthly. In our above illustration, we have taken real rate of return that we have calculated above.