Many of us work to earn an income so that we have enough money to take of our expenses once we are unable or unwilling to work to generate an income. Most of us have a question – how much do I need to retire?

One thing we call can agree is that we need wealth when we want to stop working or income so that we can use the income from wealth and part of the wealth to cover our expenses.

Let’s get the first thing out of the way – planning for retirement has less to do with our income and more to do with our expenses.

If a person spends less, then that person may need lesser corpus for retirement than another person who has a higher expense.  It’s the lifestyle choices that determine the corpus required for retirement.

Other factors that determine the corpus required are the life expectancy and the general health condition of the individual. Longer the life expectancy, greater is the corpus required.  Also, frailer the health or the more the health challenges greater is the corpus required for retirement. Planning for life expectancy and health are the most challenging part of estimating the corpus required for retirement. If it is too less, then it will be struggle in the later years and if it is too much, then one is working for much longer than required. Needless to say, it is better to overestimate the amount required than underestimate it, but the extent of overestimation is a key.

One decent thumb rule is that if one has 25 times their current annual expenses in wealth that is growing at a rate of 4% over the expected inflation then one should have enough wealth. Reason being with 4% annual return, wealth is generating yearly an income which is equal to the expense, hence the wealth has a good chance to sustain the individual over their lifetime.

Best if one can have a long-term health insurance policy or if one saves more than 25 times the annual expenses (say 30 times) so that the additional amount can be used as emergency health expenditure.

In summary the amount required to retire is about 25 to 30 times annual expenditure invested in an asset class that is generating 4% above inflation and having adequate health insurance to cover for emergency health expenses.