How much money do you need to retire comfortably?

Retirement Planning

When you are planning for retirement (whether it is at 60 or earlier), one core question that needs to be answered is: “How much money will I need to retire?”

And with social media filled with unsolicited free advice, few thumbrules float around unapologetically. I wrote earlier too about why you should be careful about arbitrary financial thumbrules. With regard to retirement, one popular norm is the 30X Rule.

What is the 30X Rule?

The 30X Rule is pretty simple. It is a way to estimate how much money you need for retirement. It is based on your current annual expenses and multiplying that number by 30.

In other words, your retirement corpus should be at least 30 times your annual expenses of today. For example, if you are 50 years old and your monthly expenses are Rs 75,000 (or annually Rs 9 lakh), then as per the 30X rule, you need 30 times Rs 9 lakh to retire comfortably. That is Rs 2.70 crore.

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The 30X rule is an extension of the globally popular 25X formula, which, in itself, was based on the 4% withdrawal rule. That is, if your retirement corpus is 25 times your annual expenses, then that allows you to withdraw 4% from the corpus every year.

Is a retirement corpus of 30x expenses enough?

To be honest, retirement planning has just too many variables and assumptions. And it is for this reason often called “the nastiest & hardest problem in finance”.

When you do proper retirement planning calculations (or an investment advisor does it for you), you will see that you have to assign values to factors such as expected returns post-retirement, inflation during retirement, the number of years you live in your retired life, life expectancy, post-retirement expense estimates, and so on.

And while your assumptions might be conservative and chosen with the best intent, the fact is, between today and the next few decades of your retirement, so many things (and values of chosen variables) can change.

Let me give you a couple of examples. Let us extend the earlier example where at annual expenses of Rs 9 lakh, using the 30X Rule, you need Rs 2.70 crore to retire comfortably.

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Say, at age 60, you have Rs 2.70 crore and the expected future returns are 7%, while the expected average inflation is 6%. If you start with Rs 9 lakh annual expenses, then your portfolio will run till age 95-96. So, the portfolio, based on current assumptions, is good for a little over 35 years.

Now let’s change a couple of things. Say the actual inflation is 7% (and not the estimated 6%). Also, the actual expenses are Rs 11 lakh (and not Rs 9 lakh as estimated). What will happen? In this case, the corpus gets exhausted by age 84 due to higher expenses and higher inflation.

So, while a 30X corpus may be enough for retirement in many cases, it might not be sufficient if one or more of our assumptions go astray.

There’s also the complication of early retirement, if that’s what is on your mind. A runway of 25-35 years will still be fine for those looking to retire at 60. But for those wanting to retire early, things could be a lot different. So, if you are planning on living solely on your retirement corpus for longer than 30 years (with conservative return assumptions), you will need to save more. Don’t just rely on thumbrules. I had highlighted this earlier in a lot more detail here: How wrong assumptions derail early retirement plans.

Also, the 30X rule doesn’t take into account other expenses for which you should save separately, such as children’s higher education, house purchase, and for unexpected payouts like having a medical contingency fund. So, while the 30x rule might be good for many, it also assumes that you will not dip into your 30x retirement corpus to buy a house, spend on children’s education, etc.

All said and done, the 30X rule is an oversimplification at best but nevertheless a good starting point. It is a useful rule of thumb to quickly estimate a ballpark figure about how much you need to save for retirement. But don’t rely on it blindly.

Also read: How to protect your retirement corpus from poor sequence of return risk?