‘How much money should I have when I retire?’ This is one of the most common questions that financial advisors and planner face when someone new approaches them for help with their future financial Goals.
There is no easy answer to this question. The retirement corpus__the amount of money one would require to have a peaceful retired life__varies from person to person, depending on a host of factors, primarily the lifestyle one wants to maintain post retirement and hence the related expenses, said Sanjeev Govila, founder of Delhi-based Hum Fauji Initiatives that provides financial services solutions to people from the armed forces.
According to Govila, one of the accepted rules in financial planning is that while calculating post-retirement expenses, it is estimated that soon after retirement the person retiring will need to spend about 70% of his/her expenses just before retirement. By spending this much the person should be able to maintain his pre-retirement lifestyle. From then on, it is also estimated that every year his/her expenses will rise by the rate of inflation. And the life expectancy is 85 years. “So in effect, at the time of retirement the person will have to build a corpus that will sustain him for the next 25 years, post retirement,” Govila said.
For example, if a person is 35 years old and has a monthly expense of Rs 70,000, when he/she retires at 60, he/she will require a corpus of nearly Rs 8 crore to maintain the same lifestyle that he/she has now. The retirement corpus will jump to Rs 11.3 crore if the same person has a current monthly expense of Rs 1 lakh.
The retirement corpus, at present, looks very large but it’s pure calculations based on practical assumptions. For example, at 6.5% rate of inflation, your monthly expenses would double in less than 12 years. And at 7.5% rate, this would take less than 10 years to double. So for a 35-year old person with a current monthly expense of Rs 70,000 and a market rate of inflation at 6.5%, it would go up to nearly Rs 3 lakh by the time he/she retires. That’s about Rs 36 lakh per annum. To provide for that large an amount, the corpus should also be large enough, financial advisors say.
So what’s the solution? According to Govila, if you have age on your side, that is if you start planning for your retirement early, you should invest more in equities and as you grow older, you should shift part of your corpus into Debt.
Also during the accumulation phase__when you are earning and is able to invest for your future Goals__the trick is to invest through the systematic investment route, financial planners and advisors say. For example, if you invest Rs 10,000 per month in an SIP fund with an expected annual return of 15%, the corpus at the end of 20 years will be about Rs 1.5 crore. If you increase the amount to Rs 25,000 and invest for 25 years, you could expect a Rs 8.2 crore corpus.
So the numbers, although they look astonishing, are very much achievable, they say.