When should I start planning for my Retirement? How much should I save for my Retirement in India? Can I Retire early? Can I maintain the standard of living after Retirement? These are the questions in the minds of many like you and me. Why we are so much worried about our Retirement in India? The reason is simple – we don’t have a social security system for the old age. So, it is a must for all of us to plan for our retired life to ensure a decent life after Retirement.
How much is enough for a Retired life?
Let us assume that Suresh is now spending around Rs. 40,000 per month for the household expenses. This includes the children’s education expenses, bills for grocery, fuel, clothes, club, doctor’s fees etc. Now, he is aged 40 and is expected to retire at the age of 60.
How to calculate the amount required for Retirement?
By the time, Suresh retires; there will not be any expenses for children’s education, because they will be settled in their life after marriage. Some other expenses related to children and the expenses on petrol etc will be reduced after Retirement. But expenses on doctor, driver and servants etc will increase during the old age. If he is planning to lead an active life, his expenses on travel also may increase. In all probability, Suresh may require the same amount of Rs. 40,000 to maintain a decent standard of living after Retirement.
What will be the value of Rs. 40,000 after 20 years?
Inflation is a big risk which reduces your purchasing power. Assuming a moderate inflation of 6%, Suresh requires Rs. 1,28,000 per month when he is aged 60. In simple words, today’s Rs. 40,000 will be equivalent to Rs. 1,28,000 after 20 years. This amount of Rs. 1,28,000 has to be increased again annually during the Retirement life to offset the inflation at that time.
How much amount is required for his Retirement at age 60?
He should ensure an inflation adjusted withdrawal of this Rs. 1,28,000 till his wife is aged 80 assuming longevity of 80 for both. His wife is 5 years younger to him and so the retired life is to be planned for 25 years. The amount required for this cash flow for 25 years is Rs. 3.4 Crores. This calculation is based on an assumption that post-Retirement, the corpus will earn 1% interest more than the inflation at that time. If the inflation is 6%, the expected rate of return is 7%.
How to accumulate Rs. 3.4 Crores in the next 20 years?
First step is to calculate how much Suresh will get from his PF and Gratuity. He is expected to get around Rs. 1.4 Crores as Retirement benefits. This is possible only if he doesn’t withdraw his PF in case of job changes. So, the shortage for Retirement planning is Rs. 2 Crores. Assuming a return of 12% from equity for the next 20 years, he can accumulate Rs. 2 Crores by investing Rs. 22,000 per month in Mutual Fund SIPs.
When to start planning for Retirement?
It is a question asked by many. We feel that Retirement planning is something which can be planned after 45 or so. Let us assume that Suresh is planning for this at age 45. His monthly investment target will be increased to Rs. 42,000 to accumulate the same Rs. 2 Crores in 15 years. Had he started planning for this at age 25, his monthly investment target would have been only Rs. 4,000 per month! Can you imagine, Suresh would have accumulated Rs. 2 Crores just by investing Rs. 4,000 per month! Yes, Retirement planning has to start early in your working life. If you start investing early, you can even plan for an early Retirement, if you wish so.
If you have not thought about Retirement planning, think about it today itself, tomorrow may be too late. Don’t invest in Insurance schemes or Pension plans. Such schemes offer sub optimal returns with less flexibility and high taxation. Get the help of a Financial Planner to calculate your requirement and plan retirement for you.