Retirement planning feels vague because the number is so far away. It stops feeling vague once you break it into three questions: how much will you spend, how long must the money last, and how much does it have to grow by then. Each has a straightforward way of getting a sensible estimate.
Step 1: what will you spend, in future rupees?
Start with what your household spends now in a month, and keep out items that will end by retirement, such as EMIs and children's fees. Then inflate it. Indian consumer inflation has averaged somewhere around 5 to 6 per cent over long stretches, and medical costs tend to rise faster. Using 6 per cent is a reasonable planning assumption.
₹50,000 × (1.06)25 ≈ ₹2.15 lakh a month, or about ₹25.8 lakh a year. The same lifestyle costs more than four times as much. It is the single most surprising number for most people.
Step 2: how big a pot supports that spending?
The question here is how much you can withdraw each year without running out. A widely used rule of thumb is the "4 per cent rule", which came from US research on portfolios of shares and bonds. India has higher inflation and a long retirement can last 30 years or more, so many planners suggest a more careful 3 to 3.5 per cent. The corpus is simply the first year's spending divided by the withdrawal rate.
| Withdrawal rate | Corpus needed | What it implies |
|---|---|---|
| 3.5% | ₹7.36 crore | More margin of safety |
| 4% | ₹6.44 crore | Closer to the textbook rule |
These figures can make you flinch. Two things soften them. First, they are in future rupees, which are worth much less than today's. Second, your own sources of income, such as a pension, rent or EPF payouts, reduce the amount your corpus must cover. Subtract those from the target.
Step 3: the monthly investment to get there
With a monthly SIP and a steady assumed return, you can work backwards from the target. For the ₹7.36 crore goal over 25 years:
| Assumed yearly return | Monthly SIP needed |
|---|---|
| 10% | ₹54,993 |
| 11% | ₹46,257 |
| 12% | ₹38,772 |
That is a big monthly commitment against ₹50,000 of current spending, and it is why most people need more than one lever.
The levers you can pull
Start earlier
Time is the strongest factor. A ₹10,000 monthly SIP at an assumed 11 per cent grows to about ₹4.97 crore over 35 years, but to only about ₹1.59 crore over 25 years. Ten extra years more than triples the result, though the contributions rise by less than half.
Raise your SIP every year
A step-up of 8 to 10 per cent a year, in line with salary growth, makes the early numbers feel manageable and the late numbers large. Try it in our step-up SIP calculator.
Use every tax-advantaged account
EPF, PPF and NPS each play a role. Counting them in your plan helps you see how much has to come from other investments. See our NPS guide for how it fits.
Spend a little less in retirement
Some costs fall when you retire: commuting, work clothes, EMIs, saving itself. Others rise, notably healthcare. Planning for 70 to 80 per cent of your current spending, adjusted for what you know about your own life, is common.
Retire a little later
Each extra year of work adds a year of contributions and growth and removes a year of withdrawals. It is a surprisingly powerful lever, and part-time work at the start of retirement helps too.
Risks people forget
- Healthcare costs. Keep a strong health policy and a separate medical reserve. Buy cover early, since it is far harder and costlier to get later.
- Bad returns early in retirement. A market fall in the first few years hurts most because you're selling while prices are low. Holding two to three years of expenses in debt or liquid funds gives you room to wait.
- Living longer than planned. Plan to age 90 or beyond rather than 80.
- Counting your house. The home you live in produces no income. Don't treat it as part of the corpus.
A bucket approach to spending
Many retirees split their corpus into three parts. A first bucket holds one to two years of expenses in a savings account or liquid fund. A second holds the next five years or so in debt funds, FDs or conservative hybrid funds. A third stays in equity for long-term growth. You refill the first from the second, and the second from the third, when markets allow. It is simple, and it keeps you from selling shares on a bad day to pay for groceries.
Where to start today
- Work out your future monthly spending with our retirement planner.
- Subtract income you expect from EPF, pension or rent.
- Choose a withdrawal rate you're comfortable with.
- Set up the SIP, and increase it each year.
- Review the plan once a year, and after any major change.
All figures are illustrations based on stated assumptions (6% inflation, constant returns, fixed withdrawal rates). Real returns and inflation vary year to year. Tax on withdrawals is not included. For a plan tailored to you, consider speaking with a SEBI-registered investment adviser.
This article is for general education and is not personal advice. Found a mistake or an out-of-date number? Tell us and we will check it.