How much wealth should I have when retiring?

A friend of mine is looking out for retirement and is keen in knowing how much he should have at retirement. To arrive at the appropriate numbers following three factors needs to be considered

·         Expected life style- Kind of lifestyle chosen will determine the expected annual retirement income. My personal opinion would be to better plan for INR 75,000- 1 lac monthly income for settling down in Indian Metros, the figure would come down for a Tier 2/3 cities   (say ex expected life style requires 12 lac annual retirement income)

·         Real Investment return- Real return is return adjusted for inflation. I have modelled 6% long term inflation. Equity instruments (stock investments, MF Equity investment) has potential to generate 4-6% real return higher than Fixed income instruments (like bank deposit; certificate of deposit, postal deposit, bond funds) has potential to generate 0-2% real return.

·         Post retirement years – life expectancy post retirement; it would be better to have optimistic life expectancy with medical advancement. For my modelling I have run a scenario of 10,20,30,40 Years of post-retirement life.

Wealth required at retirement can be computed by the following equation

Annual Income required post retirement * Income Multiplier factor

For ex Mr X wants an Annual Income of Rs 12 lac (adjusted for inflation) post retirement for 40 years; His investments would be able to generate a real return 4% return then he would require 2.45 cr and  working is as shown in table below

wealth required at retirement (Re)			Income Multiplier Factor (from table below)
Monthly retirement Income (Re)	1,00,000		Post retirement Years		40
Annual retirement Income (Re)	12,00,000		Real Return on Inv		4%
Income Multiplier Factor	20.5		Income Multiplier Factor		20.5
wealth required at retirement (Re)	2,45,73,062

Income Multiplier factor Table

		Real Return (adjusted for inflation)
		-2%	0%	2%	4%	6%	8%
Post Retirement years	10 Year	11.1	10.0	9.0	8.2	7.5	6.8
	20 Year	24.6	20.0	16.5	13.9	11.8	10.2
	30 Year	40.9	30.0	22.7	17.8	14.3	11.8
	40 Year	60.5	40.0	27.9	20.5	15.7	12.5

*Income Multiplier factor for different post retirement years and real return

Wealth required at retirement for an annual income of 12 lacs (real terms)

Amount in Cr for annual retirement income of Rs 12 Lac (real terms)		Real Return (adjusted for inflation)
		-2%	0%	2%	4%	6%	8%
Post Retirement years	10 Year	1.33	1.20	1.08	0.98	0.90	0.82
	20 Year	2.95	2.40	1.98	1.66	1.42	1.22
	30 Year	4.90	3.60	2.73	2.13	1.71	1.42
	40 Year	7.27	4.80	3.35	2.46	1.89	1.50
			Debt		Equity

Impact of Stable rental/other Income

Mr X gets monthly rental income of Rs 30,000 (contract has inflation adjustment) ; then to achieve his monthly target of Rs 1 Lac, he requires Rs 70,000 (real return) income from his portfolio; then he should have 1.72 Cr (instead of 2.45 Cr when no rental/other income)

wealth required at retirement (Re)			Income Multiplier Factor (from table below)
Monthly retirement Income (Re)	70,000		Post retirement Years		40
Annual retirement Income (Re)	8,40,000		Real Return on Inv		4%
Income Multiplier Factor	20.5		Income Multiplier Factor		20.5
wealth required at retirement (Re)	1,72,20,000

Conclusion

Retirement planning has to take into account lifestyle, Investment return, post retirement years.

Life style chosen and post retirement years are directly proportional while investment returns is inversely proportionate to the required wealth.

From the above table its clear for an annual income Rs 12 lac (inflation adjusted) for 40 years; we need to have Rs 3.35 Cr (investing in fixed income instrument @ real return 2%) whereas we need to have Rs 1.89 Cr (investing in equity instrument @ real return of 6%; 56% lower than the fixed instrument portfolio)

I suggest always plan well in advance before retirement for comfortable life style, longer years (30/40 years) and include equity in your portfolio (after considering & understanding the risk involved).