How and how much to save towards the retirement corpus

This is the second chapter on the course of learning more about retirement planning. In the previous chapter, we learned how you can calculate the required retirement corpus.

If you have not read the previous chapter, click here to read it.

Here let’s talk about how and how much to save to reach the required retirement corpus.

A quick recap of our numbers from the previous illustration workings (summary of where we stand).

  • Current Age: 37
  • Retirement Age: 55
  • Life Expectancy: 85
  • Pre-Retirement Return on Investment: 12%
  • Post-Retirement Return on Investment: 8%
  • Corpus required at the time of retirement: 7,84,19,347 (We arrived at it, through the calculations)

The first step towards identifying how to reach the required corpus, you need to know how much of your already saved amount is likely to contribute towards the required corpus.

The Illustration
Amount already saved A 1500000
Assumed Return on Investment (in %) B 12%
No. of years to retire from now (current age – retirement age) C 55-37 = 18
Formula to calculate A*(1+B%)^C 1500000*((1+12%)^18)
Expected Future Value of your already saved money Future Value 1,15,34,949

So, the difference between your required retirement corpus and the future value of the already saved amount is what you need to start planning for from now.

That is, Future Value of already saved money (in our illustration, Rs.1,15,34,949) minus Corpus required at the time of retirement (Rs.7,84,19.347). The difference is Rs. 6,68,84,398 which we need to plan for.

Hope you got your answer too.

Now, how much you need to invest to reach the corpus:

The Illustration
Corpus to get E 6,68,84,398
Return on Investment (pre-retirement) F 12%
No of Payments Per Year G 12
Time in Years (retirement age-current age) H 18
Corpus required at time of retirement ((FV*(R/M))/(((1+(R/M))^MT-1))/(1+(R/M))) 87,380

Yes, you got the amount to invest from now towards reaching your required corpus at the time of your requirement.

In the above illustration or the workings, we understood what is the monthly investment amount required to reach the retirement corpus. This is true if your investment amount remains the same throughout the investing period.

However, in all practical purposes, our income per year should be increasing, so as your expenses and your investments should also be. In those cases, the value of monthly investment gets adjusted or reduced accordingly.

In the illustration mentioned, I have considered a pre-retirement return of 12%. Why would I want to consider 12%?

Given my age and the time to retire and the risk appetite I possess, it is strongly advisable to take up a heavyweight exposure in equity instruments. However, it purely depends on the risk appetite and years left towards retirement.

Summing-it up

To find the monthly investment amount required to reach the desired retirement corpus, you need to follow:

  1. Find out the future value of your already saved and marked retirement amount.
  2. Deduct the same from the original required retirement corpus
  3. Use the above given formula to find out the monthly investment amount to reach the required amount.

So, send us your figures to get cross-checked.

Now, in the next chapter, we will be covering about

  • What are all the options for deploying your retirement corpus
  • How you can mitigate paying higher taxes.

See you then in the next chapter.