Since you have asked this question, I assume you do not have a pension. You will be receiving your PF, Gratuity etc. from your company and you have some amount of savings for your retirement.
For retirement planning, there are several factors which you may need to consider.
What will be the post retirement monthly expense?
You need to estimate your post retirement expense in today’s money value. Why is this required? Well, without knowing what you need per month post retirement, we cannot move on to the next step.
Inflation
You would have bought a kilogram of rice for 25 rupees a few years back. It now costs Rs. 50. You would have filled your car tank with petrol for Rs. 2500 a few years earlier. Well, today you will need double that money to fill the same tank. Inflation is the invisible demon which every investor needs be aware of. Some of us fail to factor this in and make a very low estimate of our retirement requirement.
Investment returns till retirement
You need to invest your savings prudently to allow them to grow well during your working years. You need to be aware of the different investment options available and make yourself financially literate. This will help you to accept market risk and invest in either direct equity or equity mutual funds. You will also need to understand the importance of not investing in the wrong product and choose the correct product. You need to maximize your investment returns to keep your retirement goal on track.
Life Expectancy
You will need to put down a life expectancy. Basically what we are trying to arrive is the number of years in retirement which needs to be serviced by the retirement corpus.
Returns post retirement
Post retirement, your money could be split into two buckets. The first bucket will contain money to pay your expenses for the first 10 years. The second bucket will service the expenses for the subsequent years. The second bucket could be invested partly in equity related investment to maximize the returns. This strategy will help to get the biggest bang for your savings.
Calculations
My assumptions are below:
Inflation: 6%
Life expectancy: 25 years post retirement
Returns for Bucket one: 6% (returns matches inflation)
Returns for Bucket two: 7% (1% above inflation)
I have taken 4 scenarios. The first one assumes a post retirement monthly expense of Rs. 30,000. The second one assumes a post retirement monthly expense of Rs. 50,000. The third one assumes a post retirement monthly expense of Rs. 75,000 and the fourth one assumes a post retirement monthly expense of Rs. 1,00,000.
Below is the computation of required corpus to cover expenses for the next 25 years:
Below is the computation of required corpus to cover expenses for next 30 years:
Bucket 1 requirement is to be invested in safe investments such as Bank Fixed deposits, Liquid mutual funds, Senior citizen saving scheme, PMVVY, POMIS etc. Here safety of principal is very important.
Bucket 2 requirement can be invested in 20 – 30% aggressive hybrid mutual funds and the rest 70 – 80% in safe investment avenues suggested for Bucket 1.
Really a nice and informative article Sriram Jayaraman.
For monthly expense of Rs 30,000 , can you clarify how the figure Rs 89,80,505 and Rs 45,65,234 is calculated in above example?
Thanks for your question. 89,80,505 is the requirement for bucket 2. It is the requirement for 11th year to 25th year. The current yearly expense is Rs. 3.6L. Future value of this after 10 years at 6% inflation is Rs. 6.44L. 6.44L is multiplied by 15 is 89.8L. We are assuming that the returns will be 7% so the present value of this 45.65L. Hope this clarifies.