The Formula To Retirement Planning

Retirement planning is an essential aspect of financial well-being that is often overlooked by individuals in their 20s and 30s. During these early earning years, most people focus on making money and allocating it toward spending, saving, or investing—decisions that vary widely depending on individual priorities, lifestyle choices, and financial awareness.

However, with time, many come to the realization that strategic financial planning for retirement is not just important, but necessary. A future without active income requires preparation today. Relying solely on employment income without building long-term assets can lead to financial stress later in life.

To ensure a comfortable and independent life post-retirement, it is crucial to start investing early. Even small, consistent investments made over time can compound into substantial wealth. The sooner one begins, the greater the benefit due to the power of compounding. Early planning allows individuals to retire not just with financial security, but with the freedom to maintain their lifestyle, meet medical needs, and pursue personal goals without dependence.

In conclusion, retirement is not a distant milestone to be addressed later—it is a financial phase that demands thoughtful preparation from today. Starting early not only reduces the burden of saving later but also significantly improves the quality of life after retirement.

Annuity is a structured approach to financial planning where a lump sum investment is made in return for a fixed and regular income—typically on a monthly basis—for a predetermined period of time. This method is especially useful for retirement planning, as it ensures consistent income when an individual is no longer actively working.

For instance, consider a person who plans to retire at the age of 60 and estimates their monthly living expenses at ₹1,00,000. In many cases, neither personal savings nor pension schemes are sufficient to consistently cover such costs over the long term. This is where an annuity becomes valuable—it allows one to calculate the lump sum amount needed at the time of retirement to generate the required monthly withdrawals, thereby maintaining their standard of living without financial compromise.

To ensure stability and predictability, we recommend investing the retirement corpus in bank-based instruments or other fixed-income products, as these offer non-fluctuating interest rates, which make financial projections more reliable. Unlike investments in volatile markets such as equities or real estate, which are subject to economic cycles and may not guarantee income during downturns, fixed-income annuities offer a safer and more dependable source of post-retirement income.

By avoiding high-risk markets during retirement and instead focusing on guaranteed returns, annuities help safeguard one's future, ensuring that basic expenses can be met consistently—even in the absence of any active income streams. This approach aligns with the primary goal of retirement planning: financial independence and peace of mind.

Based on the assumption that you retire at the age of 60, with a required monthly expense of ₹1,00,000, and plan to sustain this lifestyle until the age of 90, we calculate the amount of money you would need to invest in a bank today to ensure consistent withdrawals over the next 30 years.

The key assumptions are:

• Monthly withdrawal: ₹1,00,000

• Duration: 30 years (360 months)

• Interest rate: 6% per annum, compounded monthly (0.5% per month)

• Withdrawal at the end of each month

• Final bank balance at the end of 30 years: ₹0

Using the formula for the Present Value of an Annuity, we arrive at the total amount you need to deposit in the bank today:

Required amount to be invested: ₹1,67,00,000 (1.67 Crore)

This means that if you invest ₹1.67 crore in a bank at a constant interest rate of 6%, you would be able to withdraw ₹1,00,000 every month for the next 30 years—ensuring financial stability and a peaceful life throughout your retirement years.

This calculation highlights the importance of early and strategic retirement planning, as accumulating such a corpus over time requires consistent investing, discipline, and long-term vision.

Many of us might have a higher monthly expense or we might have different objectives for a different period of time. Therefore the following table would give a better picture for different possibilities:

Table 1:

Building upon the concept of retirement planning, you may have considered a more lasting solution—one that not only supports your post-retirement lifestyle, but also serves as a perpetual income stream for future generations. This leads us to the concept of perpetuity in financial planning.

What is Perpetuity?

Perpetuity refers to a financial arrangement where a lump sum investment is made to generate a fixed annual income forever. It is not limited to retirement planning alone; it can serve as a permanent, stable income source—one that never runs out.

There are two types of perpetuity:

1. Constant Perpetuity

   • The withdrawal amount remains fixed each year.

   • Does not account for inflation.

   • Best suited for scenarios where price stability is not a concern or where purchasing power is assumed to remain stable.

     
     

2. Growing Perpetuity

   • The withdrawal amount increases annually by a fixed rate, typically the inflation rate.

   • Designed to preserve purchasing power over time.

Constant Perpetuity: Example Calculation

Assume the following:

• You are 60 years old and have just retired.

• You desire to withdraw ₹12,00,000 annually, not just for yourself, but also to leave a legacy of income for future generations.

• The bank offers a fixed interest rate of 6% per annum.

• The income stream is intended to last forever.

Using the formula for constant perpetuity:

Present Value (PV) = Annual Withdrawal ÷ Interest RatePV = ₹12,00,000 ÷ 0.06 = ₹2,00,00,000

To create a never-ending income stream of ₹12,00,000 per year, you would need to invest ₹2 Crore in a bank offering a fixed 6% return per annum. This ensures that the interest earned each year exactly covers the annual withdrawal, thereby maintaining the principal intact indefinitely.

This model is not only practical for retirement but also serves as a financial legacy strategy, securing income for your family or dependents for generations to come. It's a compelling example of how strategic financial planning can extend beyond personal needs to long-term wealth preservation and impact.

Additionally, if we assume that you are 60 years old and have just retired, and you wish to receive ₹12,00,000 annually, not just as a source of income for yourself but also as a perpetual income stream for future generations, it's essential to factor in inflation. Over time, the purchasing power of money decreases, and without adjusting for inflation, a fixed annual withdrawal will not be sufficient in the future.

To address this, we use the concept of a growing perpetuity, which allows for the annual withdrawal amount to increase by a fixed inflation rate each year, thereby preserving purchasing power indefinitely.

Growing Perpetuity: Example Calculation

Assumptions:

• Annual withdrawal (starting amount): ₹12,00,000

• Bank interest rate: 6%

• Inflation rate: 4%

• Net effective rate (real rate of return): 6% – 4% = 2%

• Growth rate of withdrawals: 4% per annum (to match inflation)

• Goal: Withdraw ₹12,00,000 annually, with the amount increasing by 4% each year, forever

Formula for Growing Perpetuity:

Present Value (PV) = Annual Withdrawal ÷ (Interest Rate – Growth Rate)PV = ₹12,00,000 ÷ (0.06 – 0.04)PV = ₹12,00,000 ÷ 0.02 = ₹6,00,00,000

To secure a perpetual, inflation-adjusted income of ₹12,00,000 annually, starting today and increasing by 4% every year forever, you would need to invest ₹6 Crore in a fixed-return instrument offering 6% annual interest.

This approach ensures that:

• Your initial withdrawal covers current needs

• Your annual withdrawals grow in line with inflation, maintaining purchasing power

• Your principal remains intact, providing a lasting legacy for future generations

Incorporating inflation into retirement planning reflects a realistic and future-focused financial strategy, offering peace of mind not just for yourself, but for those who depend on you in the years to come.

Similar to the previous table you might wish to withdraw a higher amount or so. Hence, the following tables will give a better understanding with different scenarios:

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All of the eight-figure amounts mentioned earlier—such as ₹1.67 crore, ₹2 crore, or even ₹6 crore—may initially seem unattainable or hypothetical, especially when viewed through the lens of an average income and typical saving capacity over a lifetime. Saving such large sums through traditional means often feels out of reach. However, when approached with the right investment strategy, particularly one rooted in time, discipline, and compounding, these figures become realistic and achievable.

One such strategy involves investing in the Nifty Index Fund, Direct Growth Plan, which historically has provided a Compounded Annual Growth Rate (CAGR) of 15.95%. Index funds are among the most efficient and consistent passive investment vehicles, allowing you to grow your wealth with minimal involvement—literally earning while you sleep.

For a complete understanding of index funds—including their structure, benefits, long-term growth prospects, and a full strategic plan for implementation—we recommend purchasing our Index Funds Plan, which provides a comprehensive, actionable analysis.

Systematic Investment Plan (SIP): A Simple, Powerful Approach

The Systematic Investment Plan (SIP) allows you to invest a fixed amount at regular intervals—monthly, quarterly, semi-annually, or annually. It is one of the most effective ways to navigate market volatility, as it spreads your investment over time and averages out market fluctuations.

SIPs require:

• No active involvement

• No research or market timing

• No technical expertise

All that is required is discipline and consistency, allowing the power of compounding to work in your favor over the long term.

Real-World Example: Planning from Age 20

Let us assume:

• You are 20 years old

• Your projected monthly retirement expense at age 60 is ₹1,00,000

• Based on annuity calculations, you would need ₹1.67 crore by age 60

• You plan to invest in a Nifty Index Fund offering a CAGR of 15.95%

Using this strategy:

• You would need to invest ₹394 per month

• Duration: 40 years

• Total invested over 40 years: ₹1,89,120

• Expected corpus at age 60: ₹1.67 crore

This example demonstrates how a relatively small monthly investment, when given enough time and compounded effectively, can grow into a substantial retirement corpus.

Similarly, to achieve higher targets:

• For ₹2 crore: Invest ₹470 per month

• For ₹6 crore: Invest ₹1,415 per month

This approach proves that creating long-term wealth is not a function of extraordinary income but of early planning, consistent action, and choosing the right instrument. With SIPs in index funds, retirement planning becomes not only feasible but highly efficient—transforming modest investments into significant financial independence.

What may appear hypothetical today can, in fact, become a reality—if you start early, stay consistent, and trust the process.

Let us now take two practical examples to clearly demonstrate the real-world application of retirement planning through annuity and growing perpetuity, while also highlighting the effectiveness of index fund investing over long time horizons. These examples integrate key financial concepts such as inflation adjustment, compound annual growth rate (CAGR), and systematic investment plans (SIPs).

Example 1: Retirement Income through Annuity (Inflation-Adjusted)

Assumptions:

• Current age: 20

• Retirement age: 60

• Retirement duration: 30 years (until age 90)

• Current monthly expense: ₹1,00,000

• Inflation rate: 4%

• Bank interest rate: 6%

• Index fund CAGR: 15.95%

Step 1: Adjusting for Inflation

To estimate future monthly expenses:

₹1,00,000 today will be approximately ₹4,80,000 after 40 years(using future value formula with 4% annual inflation)

Step 2: Calculating Required Retirement Corpus

Using annuity principles, you would need:

₹8 Crores at age 60 to withdraw ₹4.8 Lakhs per month for 30 years

Step 3: SIP Requirement to Accumulate ₹8 Crores in 40 Years

• Via Index Funds (CAGR: 15.95%)Required SIP: ₹1,885 per month

• Via Bank Deposits (CAGR: 6%)Required SIP: ₹40,000 per month

Index fund SIPs reduce your required monthly investment by over 95%, showing the immense power of long-term compounding and higher returns.

Example 2: Lifetime Income through Growing Perpetuity (Inflation-Adjusted)

Assumptions:

• Current age: 20

• Retirement age: 60

• Annual income requirement: ₹12,00,000 (growing with inflation)

• Inflation rate: 4%

• Bank interest rate: 6%

• Index fund CAGR: 15.95%

Step 1: Adjusting for Inflation

₹12,00,000 today = ₹58,00,000 in 40 years(assumes 4% annual inflation)

Step 2: Calculating Required Corpus for Growing Perpetuity

Using the growing perpetuity formula:

Required corpus = ₹58,00,000 ÷ (0.06 – 0.04) = ₹29 Crores

Step 3: SIP Requirement to Accumulate ₹29 Crores in 40 Years

• Via Index Funds (CAGR: 15.95%)Required SIP: ₹6,825 per month

• Via Bank Deposits (CAGR: 6%)Required SIP: ₹1,45,000 per month

Again, index funds make your financial goal significantly more achievable by lowering the monthly investment needed—by over 95% in this case as well.

We understand that you may have multiple financial goals—retirement, wealth creation, legacy planning, or passive income—and each may require different strategies. Therefore, a series of comparative tables and combinations (as referenced) would further illustrate:

• How small, consistent investments lead to large future value

• How compounding accelerates wealth over long periods

• How the choice of investment vehicle (bank vs index fund) drastically affects required effort

These examples underscore that even 8–12 figure goals are practically attainable through well-planned, early, and disciplined investing—especially when leveraging the long-term potential of index funds.

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All of the data presented in this study were carefully calculated using Excel spreadsheets, employing specific financial formulas tailored to each scenario. While some of the figures might initially seem ambitious or unrealistic, they are firmly grounded in mathematical logic and supported by extensive analysis. With the justifications and evaluations provided throughout this investigation, we hope you find our approach both logical and viable.

We have been actively investing in the markets for the past year or two, and the insights shared here are a reflection of our personal experience, supported by research and applied knowledge. This material is not just a theoretical framework—it represents a tested methodology that has already begun to yield positive results in practice.

Having access to this information has the potential to transform your perspective on retirement planning. More importantly, these strategies are not limited to retirement—they can be adapted to suit various financial goals, whether it's building a corpus for a major life milestone, creating passive income, or leaving behind a financial legacy.

Each one of us holds the potential to create wealth through the markets. However, only a few truly understand the magnitude of gains achievable in the long run. Building wealth is not a matter of timing or speculation—it is about having patience, mental discipline, and a clear long-term vision.

With the right planning, informed decision-making, and consistency, wealth creation becomes less about effort and more about strategy. It is this blend of foresight and discipline that makes long-term investing simple, powerful, and life-changing.

"If you don't find a way to make money while you sleep, you will work until you die." Warren Buffett