'Kitna paisa actually chahiye': How to calculate the corpus you actually need for retirement - expert shares formula

A financially independent retirement is a common aspiration, but determining the precise amount needed remains a challenge for many. Neeraj Chauhan, CEO of The Financial Mall, suggests a more practical approach to calculating one's retirement corpus, challenging the notion that vast sums—such as Rs 10 crore or more—are necessary for financial freedom. "A lot of us believe financial freedom means having huge amounts of money — Rs 10 crore, Rs 50 crore, even more. But have you ever stopped and asked… Kitna paisa actually chahiye (How much you really need)?" Chauhan questions, encouraging individuals to reassess their retirement goals.

The key to establishing a realistic retirement plan, according to Chauhan, lies in understanding the 'financial freedom number.' This figure is calculated by multiplying one's annual expenses by 25, a method rooted in the 4% withdrawal rate rule. This rule advises retirees to withdraw 4% of their retirement corpus in the first year, adjusting for inflation thereafter. By adhering to this principle, individuals can sustain their corpus throughout their lifetime, potentially leaving a financial legacy for heirs. Chauhan's approach highlights the importance of strategic financial planning over the pursuit of ever-larger sums.

Chauhan explains how to calculate your Financial Freedom Number (retirement corpus) with a simple formula:

Financial Freedom Number = Annual Expenses × 25

The multiplier of 25 comes from the 4% withdrawal rule, a widely used thumb rule in personal finance. The rule suggests that retirees can withdraw 4% of their retirement corpus in the first year, then adjust withdrawals annually for inflation. This approach is designed to make the corpus last a lifetime—while still leaving a meaningful legacy for heirs.

Practical calculations

To demonstrate the feasibility of this method, a hypothetical scenario was tested involving a 50-year-old individual with a Rs 3 crore corpus. Assuming a monthly withdrawal of Rs 1 lakh, with a 4% annual increase over 30 years, and factoring in a 7% annualised investment return against a 5% inflation rate, the corpus would not only support the individual until age 80 but also grow to Rs 4.83 crore. This remaining amount could further support the retiree or be passed down to legal heirs. Such calculations underscore the importance of tailoring retirement plans to individual circumstances, considering variables such as expenses, investment returns, and inflation rates.

Chauhan provides a specific example for individuals with Rs 1 lakh in monthly expenses, equating to Rs 12 lakh annually. By applying the 'financial freedom number' formula, a retirement corpus of Rs 3 crore is suggested. This calculated approach encourages thoughtful financial planning over a blind pursuit of wealth. "So instead of blindly chasing bada amount, start working towards the right amount," advises Chauhan. "Because financial freedom is not about being rich, it's about being free and living life on your terms."

While this formula serves as a guideline, Chauhan emphasises that individual retirement planning should be customised to personal circumstances, ideally with the guidance of a financial advisor. Such planning ensures individuals can effectively prepare for retirement, achieving financial independence without unnecessary stress. For comprehensive advice, consulting a financial expert is recommended, as this approach provides a general framework rather than specific financial direction. Moreover, understanding personal financial habits and goals is crucial in this journey.