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Retirement Planner

Planning for retirement is like running a marathon. If you run too fast you would get tired and have to halt midway. If you run too slowly you would not reach the goal in time.

The trick is to maintain a steady speed keeping the goal (Finish line) in mind until the finish line is reached.For this you need a retirement planner.

Steps in retirement planning

Retirement goal
• This is similar to running a marathon where you set your goal as the amount of money (Corpus) you require at the time of retirement in order to maintain the same standard of living you are enjoying now.
How would you get there?
Higher your expenses greater would be the amount you require after retirement :
• You would have to choose investments to reach your retirement goal based on how much money you would require after retirement. If your current yearly expenses are INR 10 Lakhs then the money you would require at retirement to maintain the same standard of life you are enjoying now would be much higher than a person whose yearly expenses are INR 5 Lakhs.
Risk profile:
You have to decide what kind of investor you are
An aggressive investor
An aggressive investor invests in equities particularly Equity linked saving schemes (ELSS) which give high returns as well as tax saving benefits. An aggressive investor takes risks in order to obtain a higher return. If you are an aggressive investor you could reach your financial goals faster (You could retire early) or you could get a higher sum of money at retirement. If the stock markets crash the opposite could happen. You would have to postpone your retirement or settle for a lower sum of money at retirement.
A conservative investor
A conservative investor follows the slow and steady approach. You get there slowly ….But you do get there. (Think of a tortoise steadily moving towards its goal). If you are a conservative investor then you invest in fixed income securities in which the amount you invest is safe and you get interest on the amount invested. You would invest in PPF, Fixed deposits, Post office schemes (POMIS) or even debt mutual funds.

How is retirement planning in India done?

Step 1
Age: Your current age is 34 years. (You could add in your own age).
The age you plan to retire at 60 Years (The retirement age varies from person to person)
Time left for retirement: 60 Years – 34 Years = 26 Years.
Calculate your monthly expenses :

Items Amount (INR)
Grocery /food bills/Utilities 10000
Rent 10000
Medical expenses 1000
Theatre and entertainment 3000
Petrol 2000
Other expenses 4000
Total monthly expenses 30000

Your monthly expenses could vary depending on what you spend on and how much you spend on each month.
Your total yearly expenses are: INR 30000 * 12 Months = INR 3,60,000.
You take a holiday once a year for your family spending INR 40,000.
Your total yearly expenses are INR 4,00,000.

Step 2
Keep inflation in mind :
Inflation is the general rise in price levels in society and eats into retirement savings. Inflation kills the purchasing power of money.
Inflation can be taken on an average as 6%.

Step 3 Calculate how much you would require after retirement to maintain the same kind of lifestyle you enjoy now :
Use the Excel Calculator to calculate the amount you require at retirement.
You can also calculate the amount you require at retirement in this way:
FV= PV (1+R) ^ n

FV = Amount you require at retirement to maintain your current lifestyle.
PV = Your current yearly expenses is this case INR 4,00,000.
R = Rate of inflation (You assume it to be 6%)
n = Number of years left to retirement in this case 26 Years.
The amount you would require after retirement = Your current yearly expenses (1+ Rate of inflation) ^ Number of years left to retirement.

The amount you would require after retirement to maintain your current lifestyle = INR 400000 (1+ 0.06)26 = INR 1819753.

You would require an amount of INR 18,19,753 if you have a yearly expense of INR 4,00,000 to maintain the same lifestyle you currently lead at your retirement age of 60 Years.

You divide your yearly expenses by 12 to get your monthly expenses.
This would be a monthly expense of INR 1,51,646 when you attain 60 Years of age.
Your current expenses are INR 4,00,000 per annum which will explode to INR 18,19,753 at your retirement age of 60 years.

Retirement planning

How much money would you require after retirement?
This is the tricky part :
You have to estimate how long you would live after your retirement:
If you were to live up to 80 years (20 years beyond your retirement age of 60 years) you would have to plan for these years.
Time you are expected to live post retirement = 20 Years.

Inflation exists even after your retirement and you would have to factor this in your calculations:
Inflation is expected to be there even when you retire at the age of 60.This can be assumed at 6.5%. You would have to make an investment in instruments which give a rate of return higher than this.

Let us say you invest in a fixed deposit which gives returns of 8% in your post retirement years.
Interest rate on your fixed deposit post retirement = 8%.
Inflation rate = 6.5%.
Inflation eats into your returns and your investment in a fixed deposit fetches much lesser returns.

Actual returns on your investment in a fixed deposit :
Real rate of return = (1+ nominal rate) / (1+ rate of inflation) – 1
Real rate of return = (1+0.08) / (1+0.065)-1
Actual returns on your investment in a fixed deposit per annum= 1.40%.

So how much money (Corpus) do you require if you live for 20 years after retirement?

You would live till 80 years or 20 years after retirement.

Expected life after retirement in months (n) = 20 *12 = 240 months
Actual monthly returns on your investment in a fixed deposit (i) :
= 1.40 % / 12 = 0.001167.
Monthly expense post retirement (C) = INR 151646. (Calculated above). Money you require if you live for 20 years after retirement is
= 151646 * (1 – (1+0.001167) -240 / 0.001167) * ((1+ 0.001167))
= INR 3,17,63,564
If you live till 80 Years from your current age of 34 years then you would require a retirement corpus ofINR 3,17,63,564 which you need to have ready by the age of retirement which is 60 Years.
However you would not earn (There is no income) after your retirement years and you need to have INR 3,17,63,564 before you reach 60 years of age.
Assumption : Your spending remains constant across the years

So how much must you invest each month to get a corpus of INR 3,17,63,564 at your retirement age of 60 years?

FV (You would require an amount from your current age of 34 years till you are 80 years of age)

You have calculated this as INR 3,17,63,564 .
You are 34 years of age and the time to retirement of 60 years = 26 years
This would be 26*12 (n) = 312 Months.

You have to make investments in instruments which could give you returns around 9% (i) = 9/12% = 0.0075 You get an amount of INR 25640
You would have to approximately invest INR 26000 per month in instruments which could give you returns around 9% for 26 years to get a retirement corpus of INR 3,17,63,564 which is sufficient to last you till the age of 80 years.
Conclusion on your retirement planning
• You can invest in equity linked mutual funds (ELSS) or equity funds if you are an aggressive investor.
• If you are conservative in nature you must invest a higher amount than INR 26000 or settle for a lower corpus (amount) at retirement.

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