How Much Money Do I Need To Retire?
How much you need for retirement would be based on a number of factors both personal and beyond your control, but it helps to have a plan in place
We all work hard to earn an income, but not all of us can or want to work all of our lives. But there is a life after one retires and with increased life expectancies, one's retired life may last for twenty or thirty years or even more.
Which is why all of us need to save from our current income so that we can lead the life we want once we retire.
The Inflation Monster
When you plan for retirement or any future goal, inflation is the most important thing to consider. With inflation, the value of money falls over time and what you can buy today for a certain amount of money will not get you the same goods twenty or thirty years later. For purposes of financial planning, experts normally assume an inflation of seven per cent.
Let us assume that you are 30 years old, with 30 years to go for retirement. And you require Rupees one lakh every month to cover your expenses. Then you will need Rs 7.61 lakh to maintain the same standard of living, the first month after retirement. The expenses will go up every year and so on.
How Much Do I Need?
When planning for retirement, you have to make several assumptions. The first assumption is how much you need in the first month after retirement, your retirement age and a rate of inflation, which we have done in the example above.
The next thing you need to assume is your life expectancy. One may assume a life expectancy of 80 years.
Next comes in the expected rate of returns during your working years. Investing in equity can potentially give you high returns over a long period, so we will assume the return at 12 per cent. The rate of return on your investments during the retirement years is assumed to be six per cent, because they will mostly be in debt. We will consider current retirement savings at Rs 10 lakh.
With these assumptions, you will require a retirement corpus of Rs 20.09 crore to maintain your current standard of living when you retire. And the investments required per month is Rs 56,474. This might seem like a big amount, but if you increase your investments every year with an increase in your income, the amount you need to invest every month will become more manageable.
When making any assumptions it is better to be safe rather than sorry.
"To be on safer side one is advised to consider higher expenses, higher inflation, higher life expectancy and lower returns from investment while planning for retirement corpus as that would provide a buffer to avoid running out of money during retirement," says Abhishek Kumar, founder and chief investment advisor, SahajMoney, a financial planning firm.
For calculations, one can use the online tools available on the net or take help of a financial planner. "Make sure that contingencies are also considered while planning for retirement corpus. The planner should be able to look at the spectrum of the above variables and provide for even a worst case scenario," says Renu Maheswari, co-founder and principal
advisor, Finscholarz Wealth Managers.
One Size Doesn't Fit All
But in reality, such a quantitative approach may not always work. "I would say one needs to give 50 per cent importance to the quantitative aspect and 50 per cent importance to the qualitative aspect," says B. Srinivasan, director and founder, Shree Sidvin Investment Advisors.
He stresses there is no universal rule in retirement. Individually everybody is a case study for a retirement plan. Even for people with the same income, same lifestyle and the same profile, their requirements and their future are going to be different. The standard of living you are having and the lifestyle you are having will majorly affect your retirement.
Tackle medical expenses
"To protect their corpus from medical expenses during retirement one should buy adequate health insurance as early as possible so that they do not face the risk of rejection when they actually need the insurance cover," says Kumar, So, having adequate health insurance is important from an early age, and one also need to enhance the cover with age.
However, health insurance cover may not always be enough. There may be a need to cover the costs for assisted living which no insurance cover is available. A corpus needs to be created over and above the retirement corpus to take care of healthcare costs which only go up with age.
What Does Retirement Mean?
When one comes to think of it, retirement does not mean the end of one's career. "Also, retirement is not the time when you sit idly at home. The day you cease to work for money, you retire," says Srinivasan. You can retire at any age, but you need to plan for that.
When India became independent, the average life expectancy was 32. Today it is just above 70 years. In another few decades, there is a possibility that one may live up to 120 years or more. If you start planning for that, then nobody, (except the ones who are super rich) will be able to retire. So longevity is something that none of us can know about.
"Retirement is a very complex issue. You cannot live today at the cost of tomorrow not tomorrow at the cost of today. It is a judicial balance you have to decide on. Hence you need an advisor who will go through everything and give you the right advice so that you do not miss out today, and you also do not miss out tomorrow,' says Srinivasan.
Picture yourself rocking in a hammock on Mars, sipping space-tea. Plan well, and that dream (minus the Martian part, maybe) could be your reality!
