My friend Sujit could not stop laughing when I asked him about his retirement planning.
“Who thinks about retirement planning? I am only 30, Retirement is far away.” says Sujit. Most of us , like Sujit, having higher salaries do not believe in retirement planning. We believe in living for the day. Retirement planning, by its nature, is making plans without knowing the future. We normally postpone retirement planning and start thinking of it only after our 50s, which is dangerous.
There are lots of changes in our social life compared to 30 years ago.
Retirement Planning in the past
Our parents, in the past, preferred government jobs. Post retirement life was around 10 years, which they used to spend with children. There were not much social activity after retirement. Pension, Provident Fund and gratuity were payable at the time of retirement, which was decent enough to maintain the rest of the life. Low inflation and decent returns from investment supported their post retirement life.
Retirement Planning now
Now the situation has changed. People start working since they are 22-23 years old and prefer to retire early. The longevity has increased and it is common to see lots of people still active at age 80. Post retirement life is more active now and there is need of a lot of money. Since most of the people prefer private jobs now, there is no payout of pension after retirement. Due to frequent job changes, there may not be a gratuity for many. Even PF would have been withdrawn partially, when there are job changes. Dependence on children after retirement is an issue now, because of the cultural and social changes. Most of us prefers to be on our own after retirement. Higher rate of inflation and low rate of interest also is creating problems for the retired life.
Retired Life in future
Lifestyle diseases are going to be the part of our life. Diabetes, cholesterol, hypertension etc. are the common lifestyle diseases. Regular health checkups and doctor visit will be the order of the day. Inflation in this sector is already more than 10% . More and more advancement in medicine will increase our longevity, but with a huge medical bill. Dependency on children after retirement will be a dream as children are migrating to different locations for better opportunities.
How to ensure a steady cash flow for the Retired Life?
When to start planning for retirement?
What are the important aspects to consider?
Let us see an example for better understanding
Let us assume that the current household expense of Mr. Sujit is 40,000. This includes children’s education expenses, Life Insurance premium, Health insurance premium etc. He is aged 30 now. How can he maintain the same standard of living after retirement?
Some of the expenses like Children education, petrol expenses, Life insurance premium etc. will reduce after retirement. But expenses for health insurance, doctor’s visit, etc. will increase at that time. He may require a full time servant and a driver . In short, he may require the same 40,000 in current cost.
If Sujit wants to retire at the age of 50?
What will be the value of this 40,000 after 20 years at say 6% inflation?
It will be 1.28 Lakhs after 20 years. Sujit will require around 1.28 Lakhs per month for his household expenses after retirement! Again it will increase by 6% every year to offset the future inflation. It has to continue for the next 30 years, assuming longevity of 80. How much amount he should plan to ensure this payout?
The amount required is around 3.5 Crore.This amount, invested in safe instruments offering 8% return, will ensure an inflation adjusted payout of 1.28 Lakhs for the next 30 years. Assuming, a payout of 1.5 crores from his PF and gratuity, the shortage for retirement will be 2 Crore. He can go for a mix of PPF and mutual fund SIPs for the accumulation of the 2 Crore. Assuming a return of 12%, he has to save around 22,000 per month for the next 20 years.
Had he started this at the age of 25 (just 5 years ago), he could have reached this 2 crore mark, by saving 12,000 per month for 25 years. But if he delays further and start this from age 35, he will has to save around 43,000 per month for the next 15 years.
If Sujit wants to retire at the age of 60
The future value of 40,000 after 30 years will be 2.29 Lakhs per month. To ensure this cash flow for the next 20 years (till he is 80) there should be an accumulation of 4.5 Crore. If he can expect 2 Crores from PF and gratuity, the shortage for retirement will be 2.5 Crores. He can accumulate this by investing around 9000 per month for the next 30 years.
How to ensure a comfortable retirement?
- Start retirement planning early in life. Don’t postpone this till you are free from other commitments.
- Don’t withdraw from your PF, even on other emergencies like a child’s education. Please reserve it for your retirement. There are educational loan available, but there is no retirement loan!
- In case of job shifts, transfer the accumulated PF to the new employer. Don’t withdraw.
- Start a PPF account early in life. This is a 15 year scheme which offers tax free maturity. You can keep the account in force by depositing any amount in between 500 – 1 Lakhs every year. After 15 years you can extend it any number of times in blocks of 5 years. At present the return is 8.8%.
- Improve your skills, so that you can take up some assignments even after your retirement. Post retirement life will be active also.
What do you think is the ideal age for retirement planning? Please share your views.