How much will I need for my Retirement?

Higher disposable incomes and easy availability of finance have increased the lifestyle of Indians. People who are in mid 30s are earning handsomely and have a comfortable lifestyle today. Children’s going in good school, have own house to live in and a respectable social life. However, many of this lifestyle assets are mortgage with lenders and one is burdened with many EMIs.  All these expenses bundled with high education cost of children’s leave very less for retirement savings.

Then there is Inflation i.e. the rate at which prices of all essential items increase every year, which impact your purchasing power in future. An item of Rs 100 today will cost Rs 107 next year if inflation rate is 7%. This means that your expenses increases by this rate every year and you will have to shell out much more than what you do today to meet your living. In a survey this year the inflation rate for last 25-30 years was quoted to be near 7%. So if you are spending Rs 10000 p.m. today to meet your living, to sustain this living standard you will require Rs 54724 p.m. after 25 years .Add to this the risk of longevity i.e. the increase in your life expectancy, the retirement years can be really painful if not planned in advance.

A person generally gets concern when he/she sees the high amount of retirement corpus required for their golden years. Sometimes the ask is beyond their means. But one should take into consideration that retirement living is always based on your existing lifestyle which you have build. Since inflation decreases the value of your money the need in future will always be higher for maintaining the same standard of living.

Estimating your future requirement is necessary to ensure you can plan appropriately for your later years of life. Although, the expenses at retirement are generally lower than your current expenses as you are free from loan liabilities and children’s goals, the high cost of medication at higher age should be considered while planning. One can estimate that expenses at retirement are roughly 50-60% of your existing expenses if there are not any liabilities.

To calculate the retirement corpus one have to consider the longevity of life. You may be expecting life till 75 but may live beyond 80 which add 5-10 more years. This is substantial.

Given below is an estimation of retirement corpus for an individual who is at age 35 and wish to retire at 60.Here life expectancy is assumed till age 85.

Monthly Income (Rs)	20000	30000	50000
Monthly Expense (Rs)	15000	25000	40000
Monthly expense for Retirement (60%)(Rs)	9000	15000	24000
Inflation	7%	7%	7%
No of Years to Retire	25	25	25
Monthly Expense at Retirement (Rs)	48847	81411	130258
Life Expectancy (yrs)	85	85	85
Golden Years of  Retirement	25	25	25
Retirement Corpus Required    (Rs)	1.18 cr	1.97 cr	3.15 cr

 *Post Retirment -inflation is assumed at 6% and return on corpus at 8%

*Pre-retirement inflation is taken at 7%

The above data clearly shows the impact of inflation and indicates the need of retirement planning at an early stage. Procrastination or delay in planning impact the savings required for reaching the estimated corpus. The below table shows  how the requirement for savings increases manifold when you delay your contribution towards retirement. This can strain your finances in later years considering you have other important goals and liabilities to meet.

*Retirement age is assumed at as 60

There are many options for investment today and most of these have variable returns. This creates a lot of confusion in the mind of investors and they often end up making mistake of selecting the wrong avenue.

Historically equities have proven to be the viable asset class for investing  in the long term. One should have higher exposure to this when planning for long term goals like retirement. Due to time and expertise required for investing, direct equities are discouraged for retail investors. Also the capital required to build an efficient portfolio is very high. Contrary to this mutual funds with various category of schemes and low investment requirement is the preferred route for creating a well -diversified portfolio. It not only have options in equities but also provide tax efficient opportunities for generating returns from debt segment.

Apart from this PPF due to its EEE status also holds good for 15 years or more time horizon. The net yield, if tax benefit is utilized, is approximately 11-12% .For salaried individuals, EPF contribution is highly beneficial in meeting the retirement corpus since it too enjoys EEE status, with some conditions. With very long horizon the instrument has ability to meet most of the retirement needs. Thus by having a judicious mix of equity and debt one can create a retirement portfolio. Other asset class like gold and real estate has their own characteristcis and should be considered for defined purpose. The ideal approach is to follow asset allocation and adopt periodic rebalancing to ensure you stick to your objective. As you reach higher in age change the allocation to protect the wealth you have accumulated.

Thus, retirement planning is the one of the most important goal of life. The golden years you want to enjoy rest on how you plan. The early you start the more you will be able to allocate from your resources and the less strain you will have on your finances.