Planning for the Golden Age – Retirement – Part 1

Decoding Retirement Plan:

Why would every personal finance blogger or financial advisor stamps the importance of retirement planning?

If you have guessed the answer, I still want to reiterate that it is the ultimate financial goal, an individual has to plan for.

Yawning?

Before you stop reading, let me tell you that in this article I’m not going to cover what is retirement planning and how & why it is important.

Instead, I want to give you practical experience on how you can calculate your own required retirement corpus.

Now the next question I can sense from you is, ‘why would I want to know, how to calculate the retirement corpus when there are tons of people who can do it for us’.

Yes, you are right. But there is always a difference in experience while you drive your own car and your driver drives it for you.

Also, the aspect of you arriving at the corpus you need for the future, will not only signify the importance but also the determination you get towards the same gets multiplied.

Agreed?

Now, let’s begin the Maths class 😊

First thing first, there are so many financial goals one will have in life. Some of them are achievable/realistic/negotiable/non-negotiable etc. For which, there will always be an option to avail of a loan. Yes obviously, you need to repay it, but you can always meet the desirables through borrowings.

How about retirement?

There are no such loans where banks/financial institutions are ready to provide money for your monthly expenses. Yes, there are options like reverse mortgages where you need to pledge your living house and lead the life. But, it may not be a perfect solution given the Indian investor’s mindset of pledging the living house.

In this series, I’m going to cover:

1. How to arrive at your retirement corpus
2. How and how much to save towards the retirement corpus.
3. What are all the various options for deploying your retirement corpus
4. Best and recommended option of investing in the retirement corpus which can significantly save your taxes.

How to arrive at your retirement corpus:

Before we get into the calculation, get the following information ready: (simultaneously, I will also have my numbers ready)

Your retirement age: While some of you will say, “I want to retire tomorrow”, ideally everyone wants to call-it-a-day from working when we are financially independent. However, as you know math, you need to have X or Y number in front of you to arrive at the answer. So, you need to get your retirement age ready approximately if not precisely.

  >> My Expected Retirement Age: 55. Current Age: 37 

Life expectancy: While no one can predict this factor, it is better to consider a higher number given the current medical facilities, life of a human has increased which itself suggests the need for a sound retirement plan. So, get a number.

>> My Expected Life Expectancy: 85 

Monthly Expenses: If you are already leading a happy and desired standard of living, and aim to ensure the same cost and standard of living even after retirement, the math becomes easy. Find out your monthly expenses.

Now, what are the factors to be considered in monthly expenses:

Your household spending, fuel cost, internet connection, servant cost, and other expenses. However, you need to avoid EMIs (any type of loans) and school expenses if any, as most likely in your retirement life, you are likely to be liability-free and met commitments like school & college expenses.

Now, you would have arrived at your monthly expenses (expenses minus EMIs and school/college fees).

Then, convert your yearly commitments like vehicle insurance, medical insurances into monthly (divide by 12 if they are yearly premiums) and you will also likely to incur such expenses even after your retirement.

>> let’s consider 1 Lakh of monthly expenses.

Great, now you got your current monthly expenses. Your maths teacher should be happy now.

If you feel, you are currently overspending and will spend lesser post-retirement or vice versa, you can adjust the monthly expenses accordingly to the tune of your expectations.

The next one is Inflation, for medical and educational expenses, inflation is slightly on the higher side. But for household & other expenses, you can consider around 5% to 7%.

>> Let me consider 6%

In case, if you have already saved some amount towards retirement, get the current value of all that.

>> In my case, already saved 15 lakhs in mutual funds. 

Return on Investment: As you agree that pre-retirement, the level of risk will most likely be high, so you can take part in equity instruments. Whereas post-retirement, the risk level goes down, so either full debt portfolio or mix of equity and debt is preferred.

>> Pre-retirement return considered: 12% and post-retirement return considered: 8%

Once you get the above numbers, here we go:

This is a three-step process, first, you need to find out the value of your current expenses at the time of retirement, So,

Calculating the value of expenses at the time of retirement

Hope you have done the workings and arrived at the value of your monthly expenses at the time of retirement.

Now, I have a question, can we multiply the number of years between the retirement age and life expectancy age with the above arrived amount?

Well, if your guess is NO, Well Done.

But for others who answered YES: expenses keep increasing due to inflation year after year, so an inflated value from the time of retirement needs to be calculated.

So, how are we going to do it:

We need Real Rate of Return (RRR) as the next step.

That is, the actual effective return over and above the inflation, in this case, inflation is 6% and post-retirement return expected is 8%. So, to find out the real rate of return:

Here we go, now we are all set to identify the actual corpus required at the time of retirement to take care of the post-retirement life:

I hope you got your required retirement corpus. If you find it difficult to get the workings done, we are one click away, you can reach us or email us, we will reach out to you.

Summing it-up:

To calculate how much of the corpus required after you have the basic information with an assumed rate of return, expected inflation and life expectancy, you need to calculate:

• Calculating the value of expenses at the time of retirement
• Arriving at Real rate of return
• Corpus required at time of retirement

Next chapter, we will be talking about “How & how much to save towards the required retirement corpus.