Figure out how much money will you need to retire comfortably

Retirement planning should be one of the most important goals of everyone’s life. But unfortunately, in India, we postpone provisioning for the same, for the sake of other goals. Still, children education and their marriage planning are on the top of the list of individual’s goals. We sideline retirement planning for many years.

Gone are the days of getting regular monthly pensions from the government. Nowadays most of the people are from private jobs or running their own businesses. In today’s world when private jobs are not secured there is no question of pension from the employer and that’s made Retirement Planning more crucial. Provision for this goal should start from your first pay cheque itself. If you start contributingearly for this purpose you can build sizable amount in your retirement kitty.

What is Retirement Planning?

Retirement planning is the process of planning and managing your short and long-term finances to help achieve your financial dreams both during your working years and retired life. It involves analyzing your financial objectives, current financial position, and expected future cash flow to develop a comprehensive retirement roadmap.

In retirement planning, some important factors needed to be considered for arriving at the retirement corpus.

Amount required in each month of retired life: This is determined as a percentage of current income or a percentage of current expenses. Likely saving in some expenditure i.e. (school fees, travel cost, etc) and likely increase in some expenses i.e( medical cost), etc. need to be considered.

Nature of retirement benefits available: Pension, if any, will be provided by the employer should be reduced from the amount required in each month in the retirement phase.

Inflation rate: Inflation is the increase in the prices of goods and services over time. The inflation rate is the rate at which prices increase, resulting in a fall in the purchasing value of money. This factor is very important while arriving at the retirement corpus.

Number of years to retirement: How many years down the line the person expect to retire? These years are called the accumulation phase.

Likely rate of return on the investment made during the accumulation phase: Investor invests in different types of product for his retirements such as equity, debt, gold, and real estate. Each type of asset gives a different rate of returns. The investor should consider the average portfolio return that will be received during his period.

The number of retirement years to provide for: The retirement should plan for the lifetime of both partners — a longer period in case of concerns regarding earning potential of the next generation. The rising life expectancy of people need to be factored likely rate of return on investment of retired corpus: On retirement, the accumulated corpus will be invested to generate regular monthly income. As after retirement, the person may not be able to take too much risk the rate of return on investment will be less i.e 6 to 8%.

Retirement goal is a long term goal. For this goal your time horizon is long. You have a privilege to invest in those asset classes where your money grows more than the inflation rate. So that you can accumulate wealth in huge numbers as well as in shorter time.

Lets study one life case:

One of my client wanted to plan for the retirement. Lets list down his inputs and requirement:

His current monthly expenditure: 50,000

Current inflation: 6%

Current age : 35 yrs Retirement Age : 58 yrs

Years to accumulate retirement corpus : 23 yrs.

Let’s start calculations:

So after 23 years what is the value of 50 k assuming 6% inflation.50000*(1.06²³) = 190987.

We will consider you require 190987 rs when you retire to sustain the same lifestyle after retirement.

Next step is to calculate how much corpus is needed.

Here some more information is needed that is what life expectancy? No only yours but your spouse’s life expectancy also matters. The retirement corpus should be lasted till her life expectancy.

Here I will assume only your life expectancy ; 85 years

Retirement period : 27 years (85–58)

What is expected rate of return on retirement corpus (expected) : 8%

rate of inflation : 6%

Considering all above factors required Retirement corpus required is approx Rs 4.85 Cr.

Different asset class for retirement planning :

Debt options

  • PPF
  • EPF(for salaried employee)
  • Debt funds

Equity options

  • Equity Mutual funds
  • ELSS
  • NPS

Real Estate

  • Preferably Commercial Property

This way you can work on your Retirement Kitty amount. Start Retirement Planning from today ! It is the single most important life goal of every individual.