Retirement planning: Why should you get serious about it now

Have you seen the Hollywood movie, Wall Street: Money Never Sleeps? If you have seen the movie, you will be able to recall the famous line, “What is your number?” For those who have not seen the movie, a character named Bretton James (played by Josh Brolin) asks the protagonist, Jeremy (played by Shia LeBeouf), this question. James goes on to explain what he means, “The amount of money, you would need to be able to walk away from it all and just live happily ever after. See I find that everyone has a number and it is usually an exact number, so what is yours”.

As a fresh graduate fresh out of college, working in a large private sector company twenty years back, I also had a number in my head. Many of my friends also had similar numbers in their heads and we would often discuss how, once we reach that number, in terms of savings, we would happily retire from work and do the things that we “love” doing. A few years back, I crossed that number in terms of my savings. I have not retired. Twenty years older and wiser, I have realized that, given my family obligations, lifestyle, inflation, among other things, my current savings is not enough to sustain my family through my lifetime, if I and my wife stopped going to work from tomorrow. So, if you have a number in your head, that number will keep changing as you progress through. The sad reality is that, many of us reach retirement age much before we reach the “number” that will keep us “comfortable” though our lifetimes.

Last week I was at a retirement party thrown by my friend’s uncle, when one of the placards hung from the ceiling caught my eye. It read:

I’m retired! Goodbye Tension!! Hello Pension!!!

While the placard made me laugh at once, on second thoughts I reflected on the same. Yes, retirement can be a cause of celebration and hence a party if one has planned for continued pensions in their retirement. But what if one hasn’t?

Retirement means withdrawing from active employment or leaving work. It also means letting go of the source of income and as such while some celebrate retirement, others dread the phase considering it impossible to meet the underlying expenses. Whether retirement gives you the jitters or puts a smile on your face is entirely up to your financial planning and the portfolio you built. If you included retirement planning early in your portfolio, you are blessed to lead a comfortable retired life. On the contrary, if you delayed formulating a sound retirement corpus, or did not create any retirement corpus, you are cursed to live your retired years in financial stress.

Without going through much complications, I am enumerating few simple equation, as example :

Factor 1 -

WHAT IS YOUR MONTHLY EXPENSE ?

A standard household expense might look like this :

After 20 years, Children's Education expense will get replaced by medical expense. So let us take an approximate expense of Rs.60,000 for calculation purpose.

Factor 2 - 

WHAT IS THE INFLATION ADJUSTED AMOUNT YOU REQUIRE AFTER SAY 20 YEARS FROM NOW AT YOUR RETIREMENT ?

Expenses goes on increasing due to inflation. The above is the annual inflation rate in India from 2010 to 2015. Inflation in India has greatly reduced from the level of 9.5% to around 5% in 2015. Let us take an average figure of 6% as inflation.

Expected Monthly expense – Rs.60, 000

Inflation rate expected – 6% per annum

Period – 20 years

Expected inflation adjusted monthly expenses after 20 years = 60,000*(1.06) ^ 20 = Rs.1,92,428.

Expected inflation adjusted annual expenditure after 20 years = Rs.23,09,136 or Rs.23.00 Lakhs approximately

So, after 20 years you will need around Rs.1.92 lakhs as monthly expenses or Rs.23 lakhs every year.

Factor 3 -  

How to reach there and what are the avenues available to us ?

Maturity Amount after 20 years at different rate of return

Rate of Return of Investments options available

The equation is simple. One can invest Rs.1.4 lakhs every year in an Equity Mutual Fund for 20 years. Or you may invest Rs.1760 every month for 20 years in a Mutual Fund SIP, considering the returns are at 15% per annum.

This systematic investment habit will enable you to generate Rs.23 lakhs every year after 20 years at your retirement.

And continue to live the lifestyle you are living now, even after retirement.

Happy Retiring!