DT Personal Finance: What is early retiree’s 30X formula?

CHENNAI: If you spend some time reading about retirement (or early retirement) online, you are bound to come across various FIRE*-related concepts. One such concept is about trying to figure out how much money one needs to (early) retire.

FIRE is an acronym for financial independence and early retirement.

And how does this concept work? It is known as the 30X formula. It is an easy-to-estimate approach to how much money you will need for a retirement. And the X in the formula stands for your current annual expenses. So, the figure of 30X means that you need about 30 times your current annual expenses as your starting retirement corpus.

For example – Suppose your current monthly expenses are Rs 1 lakh (or Rs 12 lakh per year). Then using the 30X rule, you need 30 times Rs 12 lakh to retire comfortably, which comes to about Rs 3.60 Crore today. Or for example, your annual expenses are Rs 8 lakh, then by the 30X formula, you need to have Rs 2.4 crore in your retirement corpus.

So higher your annual expenses, (obviously) the bigger will be the 30X corpus requirement, and vice versa.

Some people use a more aggressive 25X formula while many others use 35X. So 30X is somewhere in the middle.

But while it’s easy-to-calculate and intuitive, is this actually, correct?

That is, does having 30X of your annual expenses in your retirement corpus enough? If you get in touch with a good investment advisor or are willing to put in some mathematical efforts and do retirement calculations properly, then you will understand that the corpus requirement depends on several factors like expenses, returns, inflation, number of years to retirement, number of years in retirement, etc.

Also, the retirement planning calculations are sensitive to all inputs. Just a small increase in one of the inputs and the required corpus size changes drastically.

While the 30X figure is a good estimate to start with, it is not a guarantee that it will work in every individual’s case. So, the reality for someone aged 59 and planning to retire in a year, will be very different from someone who is aged 40 and planning to retire early and live off the corpus for the next 40+ years!

So, to be fair, while a 30X corpus may be enough for retirement in many cases, it might not be sufficient for many others like those who plan to live on the corpus for several decades (due to early retirement). I know that if you assume you generate high returns, your corpus requirement may be reduced. But that is not a great strategy to rely on when it comes to risk management of your retirement planning.

And remember that you only get one shot at retirement. You can’t get it wrong and you will not get any loans for retirement. So, while the 30X rule is a good starting point or thumb rule, it is technically an oversimplification at best. So please don’t rely blindly on it.

Also, this 30X rule doesn’t account for other big costs like saving for your kids’ college, buying a house, or emergency medical funds. Therefore, it works for many, but assumes you won’t use your retirement savings for these big expenses.