FOCUS ON YOUR RETIREMENT PLANNING, TODAY!

The biggest financial challenge most of us facing is retirement. Unfortunately, retirement planning has not received the same level of importance and urgency which other life goals have traditionally received in India. The result, most of us are under-prepared for our retirement.

There are many things virtually wrong with the way Indians approach their retirement planning. Here are a few things which you find most common in the name of retirement planning for Indians...

1. Some X amount of pension drawn from a pension fund

2. Property rentals to support expenses

3. Hoping kids would take care of you...

However, there are things that one must be aware of regarding retirement.

1. What would be your expenses at the time of retirement and even later years?

2. How much nominal returns and 'real' returns should you expect from your retirement kitty?

3. What will be my retirement kitty based on my present savings?

4. How long will your retirement kitty last?

The most important question to ask is, how much retirement kitty do I really need?

Again, for all these very critical questions, we rarely do have an answer. So let us directly jump to answering these questions. Please note that we are only attempting to show you a broad picture and you have to take it in that spirit.

What would be your expenses at the time of retirement and even later years?

Let us assume that you have present expenses of Rs.50,000 and the inflation rate is 6%. Can you guess the amount of expenses required in future? Here is the table.

As you can see, a person of the age of 30 today would be needing Rs.3.8 lakhs monthly at the age of 60 and an astounding Rs.14.7 lakhs at the age of 80 to maintain the same standard of living. These figures are truly an eye-opener for many.

Your expenses will keep on growing due to inflation. It will not see if you are retired, earning or not. The scary thing is, most of us thing only expenses at the time of retirement. However, the expenses will continue to grow every year after retirement too, sometimes these years can stretch to 20-30 years easily with growing life expectancy.

How much nominal returns and 'real' returns should you expect from your retirement kitty?

For any retirement planning, this is the real deal here. Most Indians believe in risk-free returns after retirement. But why? Because everyone says so.

Agree that you need to worry about preserving the money you have left. But does it mean that you will be happy if it is all spent in just a few years due to rising expenses? Is it smart? Risk-free returns should only be expected to be sufficient to fund your retirement if the kitty is huge! Given that is not the case most often, you will be advised to also look for 'real returns' and invest in growth assets like equity.

We all know that the risk and volatility of returns reduce with time and since your retirement may stretch over 20-30 years, surely there is a strong case to invest some portion of your wealth in equities and make sure your kitty doesn't dry up earlier.

How much retirement kitty do I really need?

Let us just jump to the most important question. Based on assumptions, we have derived the following estimated retirement kitty amounts. The kitty makes sure that your growing expenses are taken care of from your conservative investments till the time you live. We assume that life expectancy is 85 Yrs, inflation is a constant 6% and returns on retirement kitty is 7%. Since few of us would like to retire early, we have given 3 age options as your retirement age.

What should be the required savings needed?

Well, assuming returns on investments of 12%, we have derived the mutual fund SIP amount required to be saved till retirement. As you delay the savings, the SIP input value will increase more and more. Better to start as early as possible.

Conclusion:

Retirement is fast emerging as the biggest financial challenge for most of us. Today we see that education loans can be easily acquired, alternative and new careers are emerging, dowry system is no longer prominent and late marriages by working children are often funded by themselves. On the other hand, children are unlikely to stay in one city or with parents for long, families are getting nuclear and distant, costs of medical are rising and life-style diseases are also rising. All these put together say only one thing to you – FOCUS ON YOUR RETIREMENT PLANNING, TODAY!