Retirement planning is a complex process because of uncertainty associated with the factors that impact it. For instance, job security, growth of economy, inflation, returns from investments, and rising medical expenses are some of the factors that impact financial planning for retirement.
The golden rule of retirement planning is that there is never enough. You have to incur medical expenses, face the rising inflation, and many other uncertainties that require money.
To know where the figure regarding enough savings for retirement stands, we have to guess some of the parameters such as inflation, growth in income, savings, and working life. Let us have look at an Example.
An example of retirement planning
50-year-old Vishal Sharma is a business person and earns about Rs1,50,000 per month. His average monthly expense is Rs 40,000.
He plans to retire at the age of 55. Hence, he has 5 years to retire. Vishal Sharma needs to save enough money in the next 5 years so that he can live peacefully till the age of 85, i.e. the savings done for next 5 years will help him survive for 30 years from the day he retires. He has to take into account inflation and the possible returns on investment in the calculation process.
Vishal Sharma wants to maintain the same lifestyle post retirement. Therefore, he will need Rs 40,000 per month or Rs 4,80,000 per annum (the current/present value of his future expenses). We have to factor the inflation to find the value of the sum Vishal needs after retirement.
We have assumed inflation of 8% and return on his savings and investment at 9%. Since this is retirement money, it is advisable not to put this into risky assets. However, a small portion can be kept in risky assets, too.
Factoring in inflation, the value of Rs 4,80,000 per annum on the present day will be equivalent to the value of approximately Rs 7,05,278 per annum after 5 years. Hence Vishal Sharma will need Rs 7,05,278 per annum when he retires. He will need this for next 5 years assuming a life span of 85 years. So, here is the calculation given in simple steps-
Money needed to save for retirement
Current age :50
Monthly expenses :Rs 40,000
Retirement Age: 55
Inflation Rate 8%
Rate of return post retirement 7%
Inflated cost of Monthly Expenses at start of retirement (55 years) Rs 58773
How much to save every month to achieve this
Number of years remaining: 5
Projected Life post retirement :30
Purchase Price or value of corpus needed at start of retirement Rs 2,11,58,324
Steps to decide and arrive at retirement investment amount
Step 1. Decide at what age you want to retire from your full-time job; Do that at least 10-12 years in advance so that you don’t miss any wealth creation opportunities.
Step 2 Project your typical monthly expenses post retirement and hence the amount you want to retire with for a longevity of say 80 /85 years
Step 3 Execute your plans to save up that much money – The plan should include foreclosing any pending loans before retirement, a clear strategy for pre and post retirement investment, onetime big expenses etc. Also, do special planning for high-inflationary expenses such as medical and a term-life insurance well in advance
Savings of 25-30% of current income is a must to meet the retirement expenditure. Setting aside a separate savings account for the goal of retirement planning is a good option.
Benefits of Power of Compounding and Early Investing in Retirement Planning
It is all about investing early in life and also how powerful compound interest and regular investing is. When we invest early in our lives, the amount keeps growing and when it becomes a big chunk, the growth in amount every year is a lot more, compared to initial years.
Illustrations to show benefits of starting early for retirement
The above example proves the following:
1.If you start saving early for retirement, the quantum of savings needed would be Rs.31427 per month from age 35 years to age 60 years to meet the same standard of living expenses.
2 If your savings for retirement gets delayed by 5 years, the quantum of savings needed would be Rs.40906 per month from age 40 years to age 60 years to meet the same standard of living expenses.
We hope we have answered your queries on why planning for retirement at an early stage is beneficial for you. If you still have any unanswered questions or need help, feel free to contact us.
We would be glad to help you with your planning and investment related decisions.
Debalina Roy Chowdhury
Para Planner –Dilzer Consultants