How Much Money Do I Need At Retirement?

How much money do you need to retirement?

“How much money do I need to retire?” It’s a difficult question to answer, isn’t it? Maybe it’s best to tackle it later. But how would I answer these questions that ensue…

Would I have saved enough when I retire? When would I retire? 45,60? What if I fall sick or someone in my family needs medical attention? Would I have enough to handle emergencies?

How would I safeguard my investment? Given the push and pull of the stock market.

What would be the value of my savings after years? Given that inflation is on the rise.

Which investment option maximises the benefit of tax exemptions? Given that the tax rates fluctuate.

The question of questions is, how much should I put aside for retirement? There is no magic formula! But it’s possible to find out. Before you start calculating the exact amount you need to save for retirement, here are 4 critical points you need to be clear about when estimating your ‘Retirement Fund Value’

1. You should know when you want to retire - When is the “Now is the time!” moment -– WHEN you start planning for retirement would determine when YOU can retire. Planning for retirement at an early age helps, as it gives you more time to save more.

Plan to retire early? Then you need to allocate more to your retirement corpus as the time period to save is comparatively less. It is advisable to plan at least 10 to 12 years in advance to allow for wealth creation opportunities.

Say you start saving a monthly sum of Rs.9,700 from the age of 25. Assuming a rate of return of 12% you could build a corpus of around Rs.6.3 crore. But if you start saving 5 years later, you will need to save Rs.17,800 every month to build the same corpus. That’s almost double you need to save every month!

2. Tame the Beast! - Account for inflation when estimating your retirement fund value[i] - India is a developing country and the rate of inflation is higher than in more developed economies[ii]. As the economy matures, the long-term rate of inflation would probably stabilise at 5-6%[iii]. Be conservative when accounting for inflation and the purchasing power of the rupee. Consider this…

 

 

Assumptions:

  • Assuming 6% inflation rate
  • Assuming 4% growth rate (what banks typically offer)

The value of your investment today reduces in say 10 years for now and so are your expenses. That is why you must account for inflation and check the current market value of your savings and investments at regular intervals. Use this Future Expense Calculator.

Another way to tame the beast of inflation and the rising cost of living would be to consider investing in market-linked instruments. Options like unit-linked pension plans give you the flexibility to choose where your money is invested. They have the potential to beat inflation as well as provide cover for your family in case of your absence.

3. Where does the money go! – Know your current financial commitments -

The amount of money you can save depends on your income and expenditures. So, you are often advised to be judicious with your expenses. However, expenses such as EMI on an automobile or home loan, household purchases, fuel and medical bills, family (parents/spouse / child) care, occasional vacations and other forms of recreation, cannot be avoided. Some of these might only increase and more will be added as you progress in your career and life-stage. Therefore, it is important to factor these expense into your planning as some of them will spill over to your retirement years.

4. The more the better! - Factor EPF in your retirement fund value - The value of your Employees’ Provident Fund (EPF) should be determined and factored into the retirement planning process. If you are a salaried employee, your provident fund would add to your retirement corpus and it would be good to factor it in when deciphering how much you need during retirement. Ascertain its current value prior to planning your retirement fund value.

Now, calculate how much you need to save now to support your retirement life

Work out the monthly and annual income you would need during your retirement. As a rule-of-thumb, it is reasonable to assume you would require a minimum of around 80% of your current salary to maintain your standard of living[iv]. The calculation below will help you to find out how much you need to save every month in order to achieve your retirement goals:

 

Assuming you are 30 years old

Your desired retirement age[v]

60 years

Your life expectancy

90 years

The number of years left for your retirement

30 years

The number of years left after your retirement

30 years

 

A

Your current annual expenses (include household expense, medical expenses, utility bills, transport but exclude EMI and children’s education )

 ₹6,00,000

B

Possible sources of income after retirement (Income such as pension, incomes from rent or other sources)

 ₹100,000

C

Your final annual requirement at current value (A-B)

 ₹5,00,000

D

Current annual inflation rate (assumption)

 6%

E

 (future) Value of your final annual requirement when you retire at the age of 60, 30 years from now

C * (1+D)30 = ₹28,71,746

NOTE: in EXCEL, the function FV can be used

 ~₹29,00,000

F

 Average annual rate of corpus growth after retirement (assumption)

 

 8%

G

Growth rate adjusted for inflation

[(1+F)/(1+D)]-1

2%

H

 (present) Value of the retirement corpus when you retire at the age of 60 to provide for the following 30 years of your retirement life

 E*[1-(1+G)-31]/G =  6,69,38,215

NOTE: In EXCEL, the function PV can be used

 ~6,70,00,000

I

Annual rate of return on investment (assumption)

10%

J

Monthly investment to generate retirement corpus

 (1/12)*(H*I)/[1-(1+I)-30]  = 29,446

NOTE: In EXCEL , the function PMT can be used

~₹30,000

So, now that you know exactly how much you need to save, Let your money multiply right away!  - Choose smart investment and retirement plans

Once you have estimated your retirement fund value, the next step would be to choose a suitable retirement plan. Insurance companies provide a range of retirement plans which enable you to allocate a part of your savings that could be utilized to support life after retirement. Based on your requirement, there are different types of retirement plans you could choose from:

  • Unit-linked pension plan is a lifetime cover and income plan that guarantees lifetime income for you and your spouse
  • Annuity plan is a guaranteed lifetime income plan that ensures guaranteed lifetime income for you or your spouse
  • Money-back life insurance plan provides life insurance coverage, generally, until the age of 70[vi] for plans of most insurers.

Remember – ‘Don’t invest and ignore’ - Revaluate your investments regularly

Once you have created a plan, you should re-visit it at least once a year. This process of monitoring will enable you to make adjustments to your life and career change. At this juncture, some of the questions you should ask yourself include:

  • Are you saving enough?
  • Are there some expenses you can cut back on?
  • Should you eliminate debt or increase the level of risk in your investment strategy?
  • Are there suggestions from your financial planner that you should seriously consider?

No matter how big you plan for your retirement fund to be, it won’t be enough! That’s why it’s important to manage your retirement corpus effectively.

Understand that managing your money before and after retirement is completely different. First, examine your individual situation and financial needs. Then seek advice from financial advisors before you finalise your retirement plan.

The bottom line when it comes to retirement planning is that it’s always better to start early so that you can save more, invest smart and build a larger retirement corpus. Plan your retirement wisely now!

 

[i] Inflation crosses red line: Here's how your investments can beat it, ET, Aug 16 2016; How to plan for child education expenses, ET, May 30 2016; Rising inflation: Here is how much money you need to fulfil your financial goals, April 19, 2017, Financial Express

[ii] Inflation in Emerging and Advanced Countries (Chains of Reasoning) tutor2u Economics

[iii] A must-do list for investors, Feb 17, 2017, Value Research

[iv] How much income will I need in retirement? December 2, 2015, CNN; How Much Income Do Retirees Really Need? AUGUST 3, 2015, Think Advisor; How much do you really need for retirement? CNBC, 21 Sept 2015; Here's how to calculate how much you need to save for retirement, ET, October 2016; 11 financial mistakes people in their 30s make to regret later, March 16, 2017, Business Today; For the Long Haul, October 2011, Business Today

[v] Govt-notification-to-extend-retirement-age-from-58-to-60-years-in-pvt-sectors, ToI

[vi] https://www.policybazaar.com/life-insurance/investment-plans/articles/top-money-back-plans/; https://www.bankbazaarinsurance.com/life-insurance/money-back-policy.html


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