Do you think the money you earn today will leave you financially self-sufficient in the years to come? For example, will the Rs 20,000-Rs 40,000 (or, for that matter, any amount) you earn per month today be sufficient to take care of your 'golden' years?
Perhaps not.
Which is why you need to plan for your retirement now, when you are earning and have the ability to earn more in the future.
You might wonder: why plan for retirement today when it is still many years away? Well, if you plan right now, you will be able to spend your 'golden' years without having to bother about money.
With increased life expectancy, a shortened work life and no social security, ensuring a financially secure retirement should be a matter of concern for all of us. The irony, however, is that, while retirement is inevitable, rarely do we plan for it. The habit of putting things off till they become a huge problem will only make things worse for you.
Many of us draw decent salaries but are busy buying fancy mobile handsets, consumer durables with the latest technology and spending heavily on nightclubs and parties, etc. Living life to the fullest is the mantra of the day; thinking and planning for retirement can wait.
"Retirement? Oh, it's years away. I will take it up later on." This the common refrain that I hear from many of my young friends. Slowly but surely, this approach is going to make it tougher for you to live life to the fullest during your retirement years.
It is always better to plan as early as possible for something which will ultimately happen. For those of you, who are serious and really want to make an attempt towards planning and investing for the future, here's what you can do:
Let's say a salaried individual aged between 25 and 35 years wishes to plan for her/ his golden years. Here is what s/ he can do about it.
Assumptions
|
Retirement age |
58 years |
|
Inflation assumed |
6 per cent |
|
Life expectancy assumed |
80 years |
|
Returns on retirement corpus (after retirement) |
8 per cent |
Case 1
The table looks at someone who is 25 years old and has a current annual expense of Rs 1,20,000 (column C). Assuming inflation grows at 6 per cent per year, you will need Rs 8,20,870 (column D) per by the time you retire at 58.
If you have a life expectancy of 80 years, you will have to manage the increasing expenses every year (due to inflation and medical needs) for the next 22 years.
The table below illustrates how you can reach the target of your retirement amount in two different ways:
~ By investing Rs 87,946 per annum for 5 years or by investing Rs 38,969 for 33 years if you are 25 years old today
~ By investing Rs 254,207 per annum for 5 years or by investing Rs 118, 724 for 23 years if you are 35 years old today
For both the investment periods and amounts a return of 12 per cent per annum is assumed if you have to reach the desired financial goal (column E).
| A | B | C | D | E | F | G | H |
| Current age | Retirement age (Years) | Current annual expenses | Expected expenses at 58 | Retirement corpus needed at 58 | No of years investments need to be made | Annual investment needed to achieve retirement corpus | Expected return on investment |
| 25 years | 58 | Rs 120,000 | Rs 820,870 | Rs 14,945,454 | 5 | Rs 87,946 | 12 per cent |
| 25 years | 58 | Rs 120,000 | Rs 820,870 | Rs 14,945,454 | 33 | Rs 38,969 | 12 per cent |
| 35 years | 58 | Rs 120,000 | Rs 763,950 | Rs 13,909,106 | 5 | Rs 254,207 | 12 per cent |
| 35 years | 58 | Rs 120,000 | Rs 763,950 | Rs 13,909,106 | 23 | Rs 118,724 | 12 per cent |
This table shows that you will need a retirement corpus of Rs 1.49 crores (column E) at age 58 to meet your expenses till you are 80 years old. Big task, isn't it?
The good news is that it is not too tough if you plan it right now. All you need to to is start putting money aside right now.
An annual investment of Rs 38,969 (column G) till retirement -- with an expected return of 12 per cent (column H) -- will be sufficient to help you achieve your retirement corpus. A mere Rs 3,350 approximately per month for the next 33 years can do the trick for you.
Again, if you do not want to commit for so long, you may invest Rs 87,946 per year for five years (column F) and reach the desired retirement corpus. The assumption made here (and this is easily achievable) is that your investments are growing at 12 per cent per year.
Note: These investments can further reduce (Rs 39,969 per year for five years and Rs 19,553 for 33 years) if you can generate a return of 15 per cent per year.
Case 2
Assuming you are 35 years old, here's what you need to do:
If your current annual expenses are Rs 2,00,000, then they will increase to Rs 7,63,950 when you are 58.
You will need a retirement corpus of Rs 1.39 crores to sustain your cost of living till you are 80 years old. In order to achieve that, you will need to invest Rs 2,54,207 annually for the next five years or Rs 1,18,724 annually for the next 23 years.
Note: Assumptions about inflation and return on investments remain the same as in the first case.
Now that you have decided to invest for your retirement, the next thing is to identify the schemes that can generate a return of 12 per cent.
No debt investment (investment in fixed deposits, maturity plans of mutual funds, etc) can provide such returns. As such, with time in your hand, you can zero-in on systematic investment plans (SIP) in equity mutual funds. While the returns will be volatile, an expectation of 12 per cent returns look reasonable over the long term, that is, 20-25 years, in this case.
Annual reviews are important to make necessary changes and keep things under control.
Surely, a lot of things will change during this long journey. Inflation rates, returns on investments, major events in life, risk appetite, etc. However, a smart beginning today will ensure happy golden years.
It's your retirement, it's your choice. All the very best to all of you and a happy retirement planning.
The author is a certified financial planner. He can be reached at brijesh@mandarfin.com.