The first step in planning for retirement is to estimate a retirement corpus. However, that will require you to calculate the living costs after 25 to 30 years of working. To get this calculation right, you must be close to, if not perfectly matched, the expected inflation and investment returns to build a realistic retirement corpus. So, to illustrate the point that how a slight variation in return and inflation expectation can considerably impact the outcome, we will use the calculator provided by the National Institute of Securities Markets (NISM), which is established to create financial awareness under the Securities and Exchange Board of India (Sebi).

The calculator gives a detailed picture of the outcome of the expected investments, the rate of returns, inflation, and time provided to the corpus for growth and funds you can accumulate by retirement. You simply need to provide the current age, retirement age, life expectancy, expected rate of return on investments before and after retirement, and expected inflation. Some calculators also have the option to input your existing savings.

While some details might be easy to provide, life expectancy, inflation and rate of returns can be tricky. A random expectation may adversely impact your retirement savings goal or, worse, have a deficient corpus. So, be careful when choosing variables for returns and inflation.

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Rate of Return:

 Retirement calculators ask you to input the expected rate of return, usually on a scale of 0 to 50. You should choose this carefully. Otherwise, the outcome will be different.

For example, suppose a 30-year-old man plans to retire at 60 and expects to live until 80. He invested Rs 5 lakh in the Employees’ Provident Fund (EPF), fixed deposits, and mutual funds, has monthly expenses of Rs 40,000, and expects a 15 per cent return on his investments. According to the NISM calculator, if he invests Rs 1,642 per month, his retirement corpus will be Rs 5.5 crore, which seems manageable. However, there is no guarantee that he will always get a 15 per cent return from mutual funds. So, what if the returns are 12 per cent? If all other factors remain unchanged, with a 12 per cent return, he would need to invest Rs 10,633 monthly, considerably higher than in the first case.

So, regardless of your portfolio construction—EPF, mutual funds, fixed deposits, stocks, or gold—take the average rate of return from these assets to calculate your corpus requirement. Do not be euphoric about the equity returns seen recently; be calm and set reasonable expectations.

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Inflation Rate:

According to data from the International Monetary Fund (IMF), inflation has remained below 6 per cent in the last 10 years, except for 2020, when it was 6.18 per cent, and 2022 when it was 6.66 per cent. From 2008 to 2013, annual inflation was over 9 per cent until 2014, when it fell to 5.8 per cent. However, given that unexpected events can happen and inflation could soar, experts recommend considering an average inflation rate of 6 per cent for the calculation.

When it comes to inflation, the Reserve Bank of India’s (RBI) tolerance level has been 4-6 per cent. However, a 7 per cent inflation rate may also be considered conservative. If the returns are 12 per cent and other aspects remain the same, with a 4 per cent inflation, the corpus requirement will be around Rs 3.1 crore and monthly investment requirement will be Rs 3,766. But, if the inflation is 6 per cent, the required corpus will be Rs 5.5 crore, and monthly investments must be Rs 10,633.

In conclusion, while assumptions are necessary when calculating future income, they should also be reasonable. Too high or too low expectations can both be unfavourable. So, as financial conditions change, revisit your retirement plan and take steps accordingly.