This is a question that crosses almost all minds. Unlike our forefathers, our dependence on our children for our welfare is almost nil or minimal, post retirement. We need to save and plan for ourselves, so that we are able to lead a comfortable life, without financial constraints in the golden years of life. However, the decision on how much to save may seem to be a complex issue to many individuals.
What’s the Magical Number?
There isn’t really a defined or fixed amount that would guarantee a comfortable retirement for everybody. Nevertheless, financial planners and experts advocate simple steps to help you arrive at a rough estimate to provide a financially secure retirement. Various factors are taken into consideration to arrive at this amount. The main factor that governs your retirement corpus is a person’s own individual need. It is your lifestyle, preferences, financial commitments and personal choice that determines how much you need to save for your retirement. Evaluation of individual needs not only helps to arrive at a retirement corpus, it also builds a pathway towards saving for the same.
- Step 1: When Do You Plan to retire and your Life expectancy?
When would you be out of your active professional life? A widespread practise among many is to retire once most financial/social commitments such as children’s education, marriage and home purchase is met. This is to ensure your retirement years are free of any major financial obligations. Also consider an average life expectancy to give you an idea of how many years post retirement your corpus has a role to play. So if you take an average life expectancy of say 85 years, and plan to retire by 60 years of age, you would have 25 years.
- Step 2: Determine your present expenses under current standard of living
You would need to make a realistic estimation of how much you currently require annually for living a comfortable life. Make a note of everything, rent, children’s expenses, medical and holiday costs.
- Step 3: Calculation of Future Value
As a basic thumb rule, your retirement fund should aim to let you maintain the same kind of lifestyle before and after retirement. Bear in mind, your current life style may actually cost you much more 20 to 25 years down the line. This is due to the impact of inflation. Inflation is the general increase in the price of goods and service. With the Indian economy facing an average inflation of around 8% in the last few years, its effects have to be considered, to arrive at a more realistic value. We could mathematically calculate the inflation adjusted amount as below
Future value= Today’s value * ((1 + inflation rate) ^ number of years left to retire)
For example, if your current annual expenses are Rs. 3, 00,000, and you have 39 years left for retirement, under the current inflation rate of 8%:
= 3, 00,000*((1+8%) ^30)
= Rs, 30, 18,797.
This is the amount you would require annually to maintain the same standard of living, 30 years from now.
- Step 4: How Much Do You Need to Save?
Having understood what your annual requirement is, let us look at how much your retirement corpus should be. An easy way to calculate the corpus that generates your actual annual expenses post retirement is by applying this simple mathematical formula. It factors in your annual inflation adjusted future value, along with the real rate of return expected per year. Re-looking at the above example, with an annual rate of return at 7%
The corpus needed at the time of retirement = (Annual Expenses)/ (interest expected)
= Rs. 30, 18,797/7%
= Rs. 4, 31, 25,671.43
Saving For Your Retirement
Having seen the sizable corpus needed for retirement, it is strongly recommended to have a proper retirement plan in place. For most of us retirement seems too distant hence we fail to give it much importance, or, end up with inadequate savings.
- First and foremost- Start early in life. As the wise old saying goes, the early bird catches the worm. The same applies here. The earlier you begin prioritizing your money towards retirement, the better it is. The power of compounding works best in the long run.
- With today’s market flooded with retirement products such as pension plans, annuity and endowment schemes, what you choose must be well in tune with your priorities and temperament. Your retirement portfolio must be a combination of guaranteed income, savings and liquidity for holidays or gifts to children as well as insurance for your unexpected medical emergencies.
- Last but not the least, review your portfolio periodically. Periodic review ensures you are in tune with your goals and you are generating positive returns out of it.