How to Determine Your Retirement Savings Needs
How to Determine Your Retirement Savings Needs
Retirement planning is a crucial part of financial stability, but how do you know exactly how much you need to save? Most financial experts recommend that your retirement income should be about 80% of your final pre-retirement salary, which means that if you're making $100,000 annually at retirement, you will need at least $80,000 per year to maintain a comfortable lifestyle after leaving the workforce.
Estimating Retirement Expenses
A good way to figure out how much you need for retirement is to estimate your annual expenses and multiply that by the number of years you expect to be retired. Many people aim to retain around 70-80% of their pre-retirement income per year. Consulting with a financial advisor can also provide you with customized financial packages that are best suited for your situation.
Tracking Monthly Expenses
To get a clearer picture of your expenses, start tracking your monthly expenses for 1-2 years. Capture credit card bills, UPI transactions, and currency usage. Calculate the average total monthly expense by dividing the sum of these values by the number of months. Additionally, factor in any additional expenses you may incur, such as insurance premiums, travel, and vacations. Multiply this average by a projection for inflation. In India, an 8-10% assumption might be more accurate, considering that education and healthcare inflation can be higher. Add a buffer of 10-20% for unforeseen circumstances. This approach builds in fail-safes, as suggested by the psychology of money.
Planning for Specifics and Inflation
It's important to plan separately for your children's education and marriages. For instance, MBA fees have increased by 2.5x in 10 years, illustrating the high inflation in certain sectors. Ensure that you have a debt fund of at least 12 months' expenses to protect yourself from market downturns.
Creating a Fail-Safe Withdrawal Plan
Using the example provided, if your average monthly expenses come to ?145,000 post-inflation over 10 years, this would amount to approximately ?376,000. Including a buffer of ?50,000 for additional expenses, the corpus needed would be ?13.125 million or ?13.3 crore. With a sustainably withdrawn pension (SWP) of 12, you could withdraw around ?500,000 per month, supporting the 8% inflation level while leaving a substantial ?30 million corpus for your next generation.
Additional Considerations
This approach provides a substantial buffer, ideal for ensuring that you are prepared for any unforeseen circumstances. Keep in mind, as time progresses, your estimates and targets become more accurate. Additionally, separate corpus should be created for your children's education and marriage, treating education as a minimum expense of ?10 lakh in 15 years and marriage as a personal choice with a higher scale expense.