Posted by:S. G. Raja Sekharan
This is the most common query that I get from mid/senior professionals.
Here is a framework that you can use to get your answer.
The key approach to answer this question is to focus on four parameters –
Once you have retired, assume that there is no salary and your annual expenses and large future expenses have to be met from wealth created by your financial assets.
Assuming you have two kids who are in senior school or college going (in India and not abroad), my guess is that your annual expenses would be in the range of Rs. 15 Lacs to 30 lacs - in Mumbai it will be more due to rents.
For sustaining this lifestyle, you need to have assets that give annualised cash flows more than your expenses. Plus the capital appreciation of your assets would be needed for the large future expenses and inflation.
So, to meet annual expenses of Rs 30 lacs, you would need financial assets worth Rs 300 lacs if the asset gives post tax cash flows of 10%. So if you have 8% FD’s and as interest from FD’s is taxed, assuming a post tax return of 6%, you will need FD’s worth 500 lacs to get 30 lacs per annum after tax.
If you have invested in equity MF’s which has given an annualised 15% return in the past 3-5 years - then you would need Rs 200 lacs worth of MF investments (as the capital gains in equity has 0% tax as of now). I know you are telling yourself that MF’s do not give assured returns (like FD’s) - hence you may like to keep a 50% margin of safety – then you need to keep 300 lacs in equity MF’s.
Remember you also have planned large future expenses – like kid’s education or marriage expenses. For these your financial assets must be structured such that, they will fund those large expenses.
So if you have a 100 lac expense in 2027 (ten years from now) – and assuming that land gives appreciation of 12% per annum – then investing in urban land worth 35 lacs today would be worth 100 lacs in ten years and it can sold for meeting the large future expense. You may ask why take 12% appreciation in land? Well out of experience in this field, I believe that urban land will give 15% appreciation per annum in India – so one can be conservative and take 12%.
Beyond these, you also need to have further buffer in terms of financial assets due to inflation– this is subjective and depends on you –if you have difficulty in estimating an amount – then take my suggestion and add another 200 lacs worth of assets.
Using this framework you can calculate how much is required as asset value as of today for you to be able to retire.