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How much money will be needed after retirement?

We all dream of a comfortable and secure retirement. But have you ever sat down and thought that the amount of money you are spending every month on your family today, how much the same expenditure would have increased after 20 or 30 years? If your monthly household expenses today are ₹30,000, how much money will you actually need to live a comfortable life at the age of 60? The biggest factor in retirement planning is time. The more years you have, the deeper the impact of inflation will be, but also the more time you will have for saving and investing. Let us understand the impact of inflation on the current monthly expenditure of ₹30,000, considering the target retirement age of 60 years.

This is the complete calculation

Suppose, your age is 25 years. This means you have full 35 years to save and invest. This is a very long period. Even if we assume an average inflation rate of 6%, today's expenditure of ₹ 30,000 will increase to approximately ₹ 2.3 after 30 years. Yes, you will need around ₹ 2.3 lakh every month at the age of 60 to maintain the same lifestyle. If your age is 30 years, then after 30 years your expenses will be approximately ₹ 1,72,290.

Now let's take the example of a 40 year old person. They have 20 years to prepare. At 6% inflation rate, his current expenditure of ₹30,000 will increase to around ₹96,000 by the age of 60. Due to shorter time frame, the overall impact of inflation is less visible, but the pressure to save increases because now only 20 years are left to build a big fund.

At the same time, if one starts planning seriously at the age of 50, then only 10 years are left for retirement. Here the impact of inflation will be least visible among these three. At a rate of 6%, the expense of ₹30,000 will increase to approximately ₹53,700.

A slight change of 1% can spoil the whole game.

Often we consider inflation of 6% as standard, but even an increase of 1% or 2% in it can shake the mathematics of your entire retirement fund.

Now let us understand with an example of 30 years. At 6% the requirement was ₹1.72 lakh. If the inflation rate becomes 7%, then this requirement will increase to ₹ 2.28. And if inflation reaches 8%, then this figure can reach ₹ 3.02 lakh per month. This difference is huge and can completely derail your planning.

You can estimate your future expenses using a financial formula. This is called 'future value' calculation. The formula is: Future expenditure = Current expenditure × (1 + Inflation rate)^Years left in retirement.

Health will become the biggest burden

One of the most common mistakes in retirement planning is to count only the daily expenses (like food, electricity, travelling). The expense that increases fastest with increasing age and which cannot be avoided is health services.

Doctor's fees, regular medicine expenses, hospitalization bills in case of emergency and annual medical insurance premium, these are the expenses which you cannot avoid. Inflation in the health sector often increases faster than the general inflation rate. Therefore, taking a good health insurance cover and creating a separate fund (health corpus) for medical expenses should be the most important and essential part of any retirement plan.

Start investing wisely

Financial experts are unanimous that the first and golden rule of retirement planning is – 'start early'. The sooner you start investing, the more you get the benefit of 'compounding' i.e. compound interest. A person starting at the age of 30 can build a bigger corpus by investing less monthly than a person starting at the age of 50.

In the initial phase, when you have a long time horizon of 20-30 years, you can take a little more risk in equity related investments such as mid-cap or small-cap funds. These funds have the potential to provide excellent inflation-beating returns in the long run.

But it is also important that you review your investment portfolio at least once a year. See if your investments are performing as per your expectations and goals. As you age and approach retirement, it is wise to gradually reduce this risk and move your money into safer options (like debt funds or fixed income) so that market fluctuations do not affect your accumulated corpus.