Is 1 crore enough to retire in India: Retirement planning refers to the preparation of finances or financial planning for the period after an individual retires or when he/she stops working.
Of course, some people in their early or mid-20s believe that retirement planning can be done later in life. They keep on delaying their planning for retirement.
Actually, retirement planning should start from the day an individual gets his/her first salary. This is because of inflation. It can erode the value of your money over time.
Therefore, individuals are required to invest their money in financial instruments which offer returns higher than inflation over a certain period of time. All these investments and plans will help an individual to live an independent and quality life.
Retirement planning includes the estimation of expenses, determination of the time horizon for retirement, risk appetite, tax efficiency, and several other factors.
Investors are required to stay invested in this money for the long term if they want to benefit from the compounding effect. However, how much money does someone require for retirement? Is 1 crore enough to retire in India?
Or do you need more than that? That is something debatable as investment corpus varies from individual to individual. Apart from this, several other factors come into the picture including life expectancy, death rates, etc.
In this article, we will focus on some factors which an individual should consider before the calculation of a retirement corpus. Is 1 crore enough to retire in India? Especially, if life expectancy is on the rise and inflation continues to reach higher levels. Read on to find out!
Retirement Planning – How To Start?
One primary element of financial planning is focusing on the retirement stage. Once you finish your working years, it is of utmost importance to outline the plan to cope with the time when regular income will not be available.
Investments in financial products should be made only after calculating the retirement amount. The first step in retirement planning is estimating the timeline.
If an individual plans to retire at the age of 60, it is important to estimate how much time is left until then. Nowadays, there are individuals who plan to retire sooner, and in such a case, that should be the age limit to go by.
Either way, a definite timeline is required to plan investments. How can one forget inflation when considering retirement planning?
The cost of living tends to rise every year. The value of the rupee today will not be the same a few years later. Inflation is considered a silent killer and is an important factor to consider at the time of estimating retirement corpus.
Inflation tends to impact expenses and returns on the investment. Research suggests that inflation of ~7%-8% is required to be considered for calculating retirement corpus.
Inflation – Why Is It The Silent Killer?
Before answering “Is 1 crore enough to retire in India,” it is important to understand what inflation is and how it can impact the return on investments.
In the economy, prices for goods and services change. For some goods and services, prices might rise, while for others, there can be a decline.
Inflation takes place when, on average, there is an increase in the prices of goods and services, not just of individual items. Therefore, an individual can purchase less than Rs. 1 today than he/she could yesterday.
Simply put, inflation reduces the value of the currency over time. This means that the value of INR1,00,000 saved with you today as idle money will fall in value in some years.
If we take an inflation rate of 7% per annum (just as an example), its value tends to decrease by ~86.86% in 30 years. As a result, there will be a reduction in returns realized from the investments made.
While there are individuals who believe that they have realized extraordinary returns, when inflation is considered, most investments including fixed income and gold are not able to create wealth.
Real return refers to the difference between nominal return and inflation. Inflation erodes pricing power and this is why it is considered the consumer’s greatest enemy.
Most investors tend to get lured in by the nominal rate of return, and they ignore the real rate of return.
Is 1 Crore Enough?
Not only inflation, but several other factors play an important role in estimating a retirement corpus. These factors include a pattern of expenses (basic living expenses, health expenses, gifts, vacations, etc.), expected life expectancy, any liabilities, other responsibilities, etc.
Well, assuming a hypothetical big number as a retirement corpus can give you mental satisfaction. But the real question will be “Is 1 crore enough to retire in India to cover all the retirement expenses?” Let us understand this with the help of an example.
Let us consider an individual’s age of 40. While the retirement age he has in mind is 60 years, inflation has been assumed to be ~7%. Life expectancy has been assumed to be 85 years and after-tax retirement portfolio return is ~8.5%.
If we consider the monthly expenses of Rs. 50,000, this individual will require Rs. 6,00,000 yearly. Doing the math and calculating the future value will help us in arriving at a figure of Rs. 23.2 lakhs which will be needed for the first year of retirement.
Now, if we calculate the present value, the retirement corpus required comes out to be ~Rs. 4.9 crores. This simply means that the hypothetical figure of INR1 crore is just not enough to meet the expenses after retirement.
Therefore, investments in such asset classes should be made which can provide inflation-proof returns in the long run.
To Sum Up
Since we have now answered the question “Is 1 crore enough to retire in India,” we will now see the first step that investors should take when they think of saving for retirement.
Delay in making investments can impact the final return from that asset. This is because the benefits of compounding get compromised.
More often than not, equity is considered an asset class that can help provide inflation-proof returns. However, by their very nature, markets are volatile. Therefore, a delay in the investment will cause a loss of opportunities to purchase more at lower prices.
Creation of a budget, enabling automatic transfers to SIPs or other investments, payment of a debt, etc. are some measures individuals should adopt when they think about retirement planning.
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