Most people tend to not think about their retirement plan too much. After all, you’re working, saving and investing, so you’re already doing everything you can do, right?
Wrong. How and where you invest, and whether you’re investing under a Planner’s guidance, can be the difference between simply retiring, or having truly enjoyable and relaxed golden years with no financial concerns.
Let’s look at how the numbers work and the 2 things that can have a huge impact on your retirement corpus.
1. Longer Life Expectancies
While living longer thanks to better medical care and a higher quality of life can definitely be a plus, it also means you are running the risk of outliving your retirement corpus. When planning your retirement, it is always better to be conservative when estimating your life expectancy.
For example, if you are currently 40 years old and wish to retire at 55, assuming a post retirement expense of Rs. 1 lakh per month on household, travel and medical totally and inflation of 7% p.a., your retirement corpus required would be Rs. 7.31 crores.
But, keeping everything else equal, and assuming you live until 85, your retirement corpus should be Rs. 11.52 crores.
As you can see, that’s a very significant difference. And when planning your retirement, you’d rather be safe and conservative in your assumptions, than make aggressive assumptions and come up short at a time when you would not be able to earn any income.
If you are still certain that you would like to assume a life expectancy of 70 or 75, consider what age your and your friends’ grandparents and parents lived upto to help you make a decision.
2. Higher Future Cost of Living
In the first point above, we have assumed inflation of 7% per annum. This is because, historically, over 10 year periods, this is approximately what inflation has been in the range of (6% - 7% per annum).
But in the last few years, especially from 2009 onwards, we have seen galloping inflation thanks to the ongoing global financial crisis. Considering that if you are in your mid thirties or older, and you will continue to earn for another 20 years or so, it is likely that you will witness another financial crisis sometime in the next 2 decades. If that happens, and we see inflation the likes of which we are seeing right now, the average inflation rate that we will live through is likely to be higher than 7% per annum. With an increased inflation rate, cost of living goes up exponentially, the further into the future we project.
Consider the example given in the point above, where we had assumed 7% inflation per annum. What if this figure were 7.5%? Would we see that much of a difference?
Yes, we would. Inflation can actually break your retirement. Keeping everything else equal, a 40 year old, retiring at 55 with an expense of Rs. 1 lakh a month currently and assuming a life expectancy of 75, would need to build a corpus of Rs. 8.25 crores.
If you assume a life expectancy of 85 years, you would need a retirement corpus of Rs. 13.34 crores. That’s the difference made by a 0.50% increase in inflation.
Here’s what we’ve seen so far:
Current Age: 40 years
Retirement Age: 55 years
Life Expectancy: 75 years vs. 85 years
Monthly expense in today’s terms: Rs. 1 lakh per month (including household, travel, medical)
Inflation: 7% vs 7.5%, and also let’s consider 8% per annum
|Life Expectancy ||Retirement Corpus Required at 7% p.a. ||Retirement Corpus required at 7.50% p.a. ||Retirement Corpus required at 8% p.a. |
|75 years ||Rs. 7,31,85,054 ||Rs. 8,25,73,408 ||Rs. 9,31,80,530 |
|85 years ||Rs. 11,52,65,723 ||Rs. 13,34,21,911 ||Rs. 15,45,80,695 |
So you see the difference these 2 assumptions can make.
Somebody being conservative in his assumptions and wishing to be safer in his retirement might assume a life expectancy of 85 years and an inflation rate of 8% p.a. This would prompt him to invest more funds to achieve a retirement corpus of Rs. 15.45 crores.
Another person being aggressive in his assumptions might assume a life expectancy of 75 years and a rate of inflation of 7% per annum, leading him to the conclusion that a corpus of Rs. 7.31 crores would be enough for his retirement.
While there are no guarantees on how long you will live and what the average rate of inflation will be during your lifetime, consider this: if you plan for a larger figure and manage to achieve all or most of it, and the inflation rate on average turns out to be lower, your quality of life during your golden years will be that much richer. In the opposite situation, your quality of life would suffer to that extent.
Ideally, you should operate under the guidance of a retirement planner who will help you quantify and achieve your retirement goal by channelizing your investments into the right avenues under the right asset allocation for your risk appetite and goal time horizon. Your Planner will help you take into account a number of factors other than the two points given above, for example:
- Your Planned Retirement Lifestyle
You might be working 10 hours a day now and hence not spending but earning money during a large part of the day, but when you retire, you’re going to have a lot of free time and most likely, your expenses will go up. You need to ask your planner to help you figure out lifestyle options during your retirement years, and the corresponding expenses that go with the difference choices. Many people opt to do social work, and to take up hobbies such as travelling, painting, photography and so on. You need to figure out the cost attached to each one of these options, if any.
- Your Tax Saving Avenues (both now as well as post retirement)
A rupee saved is a rupee earned. And a rupee earned and invested today can become a lot more rupees by the time you retire. Give your tax saving exercise the importance it deserves, not just tax saving under Section 80C but also holistic tax planning as part of your overall Financial Plan.
- Medical Costs Will Likely Go Up Drastically
Do you remember what medical care cost 10 years ago? On average, medical care costs can go up as much as 15% every year. And with an insurance policy that is not up to the mark, your claim settlement could be low, which means greater out of pocket expense. Not only do you need an excellent health insurance policy where you know you will not face too much trouble during claim settlement time and that will cover you both pre and post retirement, but you also need to build up a medical contingency fund.
What Should Your Next Step Be?
Your Financial Planner and you need to sit down together and discuss these points and more to come up with the perfect retirement plan for you. However, to get started with the basics, you can first access our Retirement Calculator to see what your Retirement Corpus number is.
To speak to a Financial Planner, call us at (022) 6136 1200 or write to us at email@example.com. We would be happy to help you plan for and achieve your retirement and your other life goals such as children’s education, house purchase, car purchase, family vacations and anything else you wish to achieve by building you a Comprehensive Financial Plan.