Retirement planning is one of the most important aspect of financial planning and goal-based planning. It is often the most neglected part of one’s life too.
We need to consider the following facts, and this will make it clear why retirement planning is most important.
- Income of majority will become zero or drop significantly once we retire
- Medical expenses may increase: chances of one getting the disease of modernization and senility are more as we pass through the retirement age
- Inflation is still lurching at our spending and investment
- Both commitment and uncommitted expenses are bond to increase:
Retirement planning needs to be started at the earliest, infect it would not be wrong to say: Start it with your first pay check the time when we receive our first salary or income Next question is
How much is needed for retirement?
Let’s Consider an Example Mr Kumar, 35 years, married with lady, has kids and is in a stable job His monthly committed expenses is approximately 1 lakh / month Committed implies essential and unavoidable expense His non committed expense is 2 lakhs / year
Non committed means to say: something like vacation, buying gift for someone. Now he plans to retire at 60 years His monthly expense will not be 1 lakh / month when he retires at age of 60 years It would have increased to 430000/ month when he retires considering inflation of 6% Inflation is also getting compounded His non committed expense would be 9 lakhs / year
Let’s consider his life span is 80 years So he will live for 20 years following retirement Total corpus needed will be 4.3x 12 x 20 + 9 x 20 = 1210 lakhs That’s is approximately around 12 cores
This is over calculation because majority feel the expenses will be reduced in Retired life: But we never know, it’s better to overestimate the requirement and then underestimate.
The above calculation does not take into account post retirement return from investment amount inverted and withdraw the monthly requirement from the pool: at time of requirement the corpus needed will be at least 10 crores This is the required corpus Needed 10 Crores
The next question is where do we invest? So how much should one invest / month towards the retirement goal only if one has to be achieved the desired retirement corpus. Let’s have following assumption 1. The returns expected out of our monthly expenses over next 25 years will be 8% (post taxation) : it does not mean one has to redeem or book capital gains regularly It just means taxes have been taken care of If you get more returns, then the corpus will be bonus
Always under calculate So get 10 crores In next 25 years One needs to invest 1 lakh / month Rule of thumb: At least invest a amount equivalent to present monthly committed expenses towards retirement Now the next important issue is If we invest equal amount of monthly expenses towards one goal that is retirement alone, how can we fulfil other goals? So in above example: the concerned person should have income of at least 2lakhs for one to have sufficient surplus to invest for retirement
She should be saving, not just saving but investing well at least 50% of his income towards retirement goal considering 8% returns from investment Now if 50% of his income is going into retirement planning alone , what about other goals like child education , child marriage , annual vacation , having own home etc
There are only two options to achieve the all the Goals apart from Retirement planning
- Increase the amount of percentage of saving / month
- Increase the returns from investment from 8% to 10 %
Option 1 is not possible up to certain limit: because beyond certain point one can’t increase the percentage of saving without compromising on quality of life So the only option is
Option 2 to increase the % of return How do we increase the percentage of return from 8 % to 10%? It is by investing in asset class which has potential to do so:
Which is the asset Class Which has potential to Generate Inflation adjusted returns and help achieve our Goal?? The things potential is very important: it definitely has the potential but there is no guaranteed Remember the life which we are leading is not guaranteed: Then why be trapped by Guaranteed Investment products?? Read further to know more about this much neglected and important asset class which provides Liquidity and Inflation adjusted returns
So one has to consider Equity as an asset class to invest Retirement is planned by investing in combination of 1. Fixed return instrument: FD, PPF, Liquid fund, Debt fund 2. Equity mutual fund If one sticks to guaranteed class of investment product then, then one has to lead the Retired life in poverty: a worrisome situation where we shall be cursing our kids for rest of life.
Your retirement well That is truly Sar Utha ke Jio We fall trap to Guaranteed products and love and adore them But if we invest a major chunk of our savings into them : Still we can fulfil all our goals The only way possible is save 80% of your income and invest all of it in this guaranteed product ( practically Impossible whether its Single income couple or double income couple ) One has only 20% of income left to meet the monthly expenses: practically not possible Choice is yours Personal life and personal finances cannot be personalized