Saving towards retirement is good start, but it will help if you can figure out how much you need & work towards it
The recent Vodafone ads featuring dancers Shanta and Dhananjayan have made retirement and old age look cool. The couple are in their 70s and the whole series of ads with them exploring Goa is a sign of what people are expecting their retirements to be. Gone are the days when retirement meant staying put at home on an easy chair. These days, people are anyway living well into their 80s and even 90s in good health to boot. At the same time, aspirations of many 30-year old is to retire by 50, without realising that they may be living for a lot many years in retirement than the years they would have worked.
An important factor to consider when planning retirement is to work towards how much you will need to live your life in retirement. If you are used to a certain lifestyle today, it takes an effort to scale back on it after your retirement and you may not want that. There are thumb rules that indicate that you will need 60-80 per cent of your current monthly household expenses when you retire. While these are good figures to make a start, they are not completely reliable. Learn to start planning based on today’s rupee terms and then add inflation and other factors that affect prices to imagine what you may actually need when you retire.
For instance, if you need Rs 20,000 a month today to manage your household, you will need over Rs 80,000 a month-or nearly Rs 10 lakh a year-to service the same quality of life after 30 years, assuming a conservative inflation rate of 5 per cent. The idea is not to scare you off, but to point at the realities of life and the way finances are changing. The 5 per cent inflation figure itself is very conservative and assuming that things will even out over time. However, even a 1 per cent increase in inflation could upset your retirement plans.
How big a nest egg?
This pivotal question cannot be answered easily without knowing more about you. It rests on some projections you must make, based on your life circumstances, and on some critical assumptions about how the future will unfold. But even if you have a ballpark figure and are clear about the assumptions on which it rests, you'll have a target to work towards. First, at what age you retire is a matter of your preference, but remember that early retirement comes at a financial cost. If you retire at age 55, you will need a substantially bigger retirement corpus than if you do at age 60.
Likewise, whether you'll choose to work part-time post-retirement or give yourself over completely to the golf-and-grandchildren routine is a key determinant. Your health condition is another factor: it will determine how soon you will retire, how much you'll need to provide for post-retirement medical care, and how long you will likely live.
More importantly, the choices that you make with respect to your 60-plus lifestyle—whether you will live in a big city or a small town, will you maintain a car—will impact how much you need in retirement. Make a list of your current expenses, and try and figure which of them are likely to fall (perhaps housing, commuting) and which will rise (healthcare, leisure). Be conservative with these calculations, but do not under budget.
To determine the future value of your expenditure figure, you must factor in the effect of inflation. Of course, projecting inflation rates over 30-year tenure is at best a guesstimate, but it's nevertheless important to work out several 'what-if' scenarios. As can be seen, even a 5 per cent inflation rate can quadruple your monthly household expenses over 30 years. And, today, for a whole lot of things the inflation figure is over 7 per cent.
It is one thing to save towards your retirement corpus, another to invest even during retirement. A lot will depend on whether you will start drawing from your starting retirement corpus to support your income needs or just live off the earnings and never touch the principal. For how many years will you draw that income? Should it keep pace with inflation throughout those years? Answers to these will determine in the kind of instruments you should invest when you retire and how long you should continue the same.
Remember the belief that once you retire you will typically be risk-averse with your investments, just the way by observing the Dhananjayans you realise that 70-year olds are fine to try paragliding. Get out of the stereotypes of assuming to live off your retirement corpus, as that is one of the most unlikely scenarios you will live with if you are under 50 years old today. At the same time, do not be overwhelmed reading this and worry over retirement. Make a start, you can keep refining the retirement corpus that you need once every 5 years and more frequently as you reach closer to your desired retirement age.