How Much to Save for Retirement: A Step-by-Step Guide for Beginners

How Much Should I Save for Retirement? A Step By Step Guide

 

Retirement planning is crucial, especially for working professionals in India, where traditional pension systems are largely absent, and individuals must take responsibility for building their own retirement corpus. The question many ask is, “How much should I save for retirement?”. In this stepbystep guide, I will walk you through how to determine the right amount to save for your retirement, tailored to Indian professionals.

 

Understand Your Retirement Goals

 

Before jumping into numbers, the first and most crucial step is to define your retirement goals. The amount you’ll need depends on your desired lifestyle, life expectancy, and health considerations.

 

What Kind of Retirement Do You Envision?

 

When planning for retirement, consider:

 At what age do you plan to retire? Many Indians aim for retirement at 60, while some may plan to work longer or retire early.

 What lifestyle do you expect in retirement? Will you want to travel extensively, live a simpler life, or maybe even work parttime during retirement?

 Where will you live? Living costs vary greatly between urban and rural areas. Retiring in a metropolitan city like Mumbai will be much costlier than in a small town.

 

The more clarity you have about your future goals, the easier it is to plan the amount needed.

 

Estimate Your Retirement Expenses

 

A useful thumb rule is that you’ll need about 70 to 80% of your Pre retirement income to maintain a similar standard of living post retirement. Here’s how you can begin estimating:

• Track your current monthly expenses and adjust for retirement. For instance, you might save on commuting and professional attire but expect higher healthcare costs.
• Factor in inflation: Inflation can have a significant impact on your savings. At an average inflation rate of 6%, your purchasing power can reduce significantly by the time you retire.
• Account for life expectancy: Life expectancy in India has been steadily increasing. It's best to plan for living until at least 8590 years, even though the average life expectancy is currently around 7072 years.

 

 Calculate Your Retirement Corpus

 

Once you have an estimate of your annual expenses, you need to calculate how large your retirement corpus should be.

 

Use the 25x Rule

 

A simple way to estimate how much you need for retirement is the 25x rule. This rule suggests that you should aim to have 25 times your annual expenses saved before you retire.

 

For example:

 If you estimate that you will need ₹10 lakhs annually in retirement, multiply that by 25.

 ₹10,00,000 x 25 = ₹2.5 crores

 

This means you would need ₹2.5 crores saved by the time you retire to cover 25 years of expenses, assuming you withdraw 4% of your retirement corpus annually.

 

Factor in Inflation and Health Costs

 

While the 25x rule gives you a rough idea, you should consider adjusting it for inflation. For instance, if your current expenses are ₹10 lakhs per year, by the time you retire in 2030 years, you may need ₹25 to 30 lakhs annually due to inflation.

 

In addition to inflation, consider rising healthcare costs, especially after retirement. Opt for health insurance coverage that takes care of potential large medical expenses, as healthcare costs are rising faster than general inflation.

 

Consider Additional Income Sources

 

While calculating how much you need to save, consider if you’ll have any other sources of income. Some common sources include:

 Employee Provident Fund (EPF): Most Indian salaried professionals contribute to EPF, which will be a significant part of their retirement corpus.

 Pension from NPS (National Pension Scheme): The NPS offers a mix of equity and debt options, and part of the retirement corpus can be withdrawn as a lump sum while the rest provides a pension.

 Rental income or investments in real estate: These could help lower the savings target.

 Social security programs: Though India doesn’t have extensive social security programs like Western countries, there are pension schemes such as Atal Pension Yojana.

 

Create a Savings Plan

 

Now that you have a target in mind, it's time to figure out how much you need to save and invest each month to reach that goal.

 

Start Saving Early for Compound Growth

 

One of the biggest advantages of starting to save early is the power of compound interest. The earlier you start, the more your money can grow. For example, if you start saving ₹10,000 per month in your 20s, it will grow much more by the time you retire than if you start saving ₹25,000 per month in your 40s.

 

The table below demonstrates how compounding works:

Starting Age	Monthly Investment (₹)	Returns @12%	Corpus at 60 (₹)
25	10000	0.12	3.5 crores
35	15000	0.12	2.5 crores
45	30000	0.12	1.8 crores

As you can see, starting earlier means you need to invest less while achieving a larger corpus due to compound growth.

 

Use TaxAdvantaged Accounts

 

In India, there are several tax saving options that help you save for retirement:

EPF: Contributions to EPF are tax-deductible under Section 80 C.

NPS: Contributions to NPS are tax-deductible under Section 80CCD (1), with additional deductions under Section 80CCD (1B).

Public Provident Fund (PPF): PPF offers tax free interest and maturity and is a great long term investment option.

 

Maximizing contributions to these accounts not only helps save for retirement but also reduces your current tax liabilities.

 

Diversify Investments

 

To build a solid retirement portfolio, it’s important to diversify your investments across different asset classes:

Equities: Provide higher returns over the long term. You can invest in mutual funds, index funds, or stocks directly.

Debt instruments: Offer more stability. EPF, PPF, and fixed deposits (FDs) are popular debt options.

Real estate: Investing in property for rental income or capital appreciation can be part of your retirement plan.

Gold: A small portion of your portfolio in gold can act as a hedge against inflation.

 

Adjust for Life Changes

 

As life progresses, your financial situation might change. Regularly reviewing your retirement plan is essential to ensure you're on track.

 

Re-balance Your Portfolio

 

As you approach retirement, shift your portfolio towards more conservative investments. While stocks provide higher returns in the long run, they also come with greater risks. Moving to a more balanced or debtheavy portfolio as you near retirement protects your savings from market volatility.

 

Plan for Emergencies

 

Unexpected life events such as health emergencies or job loss can derail your retirement savings. It’s important to build an emergency fund equivalent to 6 to 12 months of living expenses, separate from your retirement savings.

 

Conclusion: Secure Your Financial Future

 

For working professionals in India, planning for retirement involves understanding your goals, calculating your savings needs, and starting a disciplined investment plan early. By using the 25x rule, factoring in inflation, and leveraging tax-saving investment options, you can build a robust retirement corpus and for better results take a Advice from your Financial Expert.

 

Remember, retirement planning is a long-term process, and the key is consistency. Start today, and you’ll be well on your way to a secure and comfortable retirement!