Retirement Calculator: How It Works
Retirement planning is one calculation done twice: how much you will need to spend each year once you stop earning, and how large a pot generates that spending for as long as you live. This page walks through both, and the inflation adjustment that most quick estimates omit.
Step one: the expense you are actually funding
Start from current annual expenses, not income. Then adjust: commuting, work clothing, mortgage payments and the saving itself usually stop; healthcare, travel and support costs often rise. Many planners use 70–80% of pre-retirement spending as a starting point, but a household that will have cleared its mortgage may land near 60%, while one planning extensive travel may exceed 100%.
Then inflate it to your retirement year. Spending 6,00,000 a year today, retiring in 25 years, at 6% inflation: 6,00,000 × 1.0625 = 25,75,000 in the first year of retirement.
Step two: the corpus
You need a pot that funds a rising expense for 25–30 years. A defensible approximation uses the inflation-adjusted (real) return during retirement:
Corpus = E × [1 − (1 + g)−y] ÷ g
where E is the first-year expense, y the years in retirement, and g the real return — your post-retirement return minus inflation. At 8% return and 6% inflation, g = 1.89%.
Continuing the example, E = 25,75,000, y = 25, g = 0.0189: corpus ≈ 5.05 crore.
That figure shocks people, and the shock is mostly inflation over 25 years of accumulation plus 25 more of retirement. It is not the calculation being pessimistic.
Step three: what you must save
To build 5.05 crore in 25 years at 11% pre-retirement return, using the SIP formula:
| Start saving in | Years to retirement | Monthly saving required |
|---|---|---|
| Year 0 (age 35) | 25 | ≈ 33,700 |
| Year 5 (age 40) | 20 | ≈ 58,900 |
| Year 10 (age 45) | 15 | ≈ 1,08,000 |
| Year 15 (age 50) | 10 | ≈ 2,19,000 |
Waiting ten years does not raise the requirement by 40% — it more than triples it. Retirement is the clearest case where time is not merely helpful but structurally irreplaceable.
Withdrawal rules and their limits
The widely quoted '4% rule' says you can withdraw 4% of the initial corpus in year one and raise it with inflation thereafter, with a high probability of lasting 30 years. It was derived from a specific market history and a specific portfolio, and it assumes low fees and no large one-off costs. Treat it as a sanity check, not a guarantee. Lower-return environments, longer retirements and higher fees all argue for a more conservative rate.
The three risks a spreadsheet hides
- Longevity. Planning to a life expectancy means roughly half of people outlive the plan. Plan to an age you are unlikely to reach.
- Sequence of returns. A severe market fall in the first few years of withdrawals does disproportionate damage, because you are selling assets at depressed prices. Holding two to three years of expenses in cash or short-term instruments blunts this.
- Healthcare. Costs rise steeply with age and typically inflate faster than the general index. Budget for it separately rather than folding it into general expenses.
Re-run it, regularly
Every input here is an assumption that will be wrong. Returns, inflation, your expenses and your retirement date will all move. Re-run the calculation annually and treat the corpus figure as a moving target you steer toward rather than a number you compute once.