The Story of a Strange Relationship

Three pertinent questions in anyone’s personal finance can be these – how much life insurance cover I require – how much corpus should I target to accumulate so that my retirement years are spent without any financial stress – how can I achieve ‘financial freedom’ even before my retirement year? What if I tell you that the answers to all these three questions are closely interconnected and can be found out using exactly the same formula? Not believing me? Let’s check. Say, you are aged 40, planning to retire at age 60 and assumed life expectancy is 85 years of age. Also, your current monthly household and lifestyle expenses stand at 50,000 per month. Other assumptions include – 7% inflation and 10% average return from post-retirement portfolio of investments. Considering all this, you will then need to have a retirement corpus of Rs. 3.62 Crore at your age 60. Now, suppose you wish you had enough money to retire tomorrow morning. That is, your assumed retirement age is also 40. Then you would be requiring Rs. 1.47 Crore for that to happen, which is nothing but your ticket to ‘financial freedom’ - in other words you would no longer needs to work for money anymore. Financial freedom need not be planned immediately though, you can aim to achieve financial freedom even after a few years also. So far, we have only considered planned or voluntary retirement. What if, a family’s breadwinner’s income stops because of his/her untimely demise. The required amount is still the same i.e., the amount he/she requires for immediate financial freedom. Or we can call this amount now – the required amount of ‘life insurance cover’ that one must have. I hope, by now, you are fully convinced that – retirement corpus, financial freedom amount and required amount of life insurance cover – are all closely interconnected.