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Ask Mint Money | Remember to factor in inflation when building a retirement kitty

Ask Mint Money | Remember to factor in inflation when building a retirement kitty
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First Published: Thu, Jan 20 2011. 10 22 PM IST
Updated: Thu, Jan 20 2011. 10 22 PM IST
I am 36 years old and my annual post-tax income is around Rs13.5 lakh. My monthly expenses are around Rs50,000. I own a self-occupied house worth Rs80-85 lakh. I am married and have a four-year-old son. I have a term life cover (sum assured Rs55 lakh), a unit-linked insurance plan, or Ulip, (sum assured Rs5 lakh), Public Provident Fund, or PPF, (Rs10 lakh in my name and Rs2.2 lakh in my son’s name), Employees’ Provident Fund, or EPF, (Rs8 lakh), stocks (Rs4 lakh), six mutual funds (Rs15 lakh). I don’t require an emergency fund since my parents are there to support. I have another Rs5 lakh to invest. My goals are buying a bigger house worth Rs1 crore. The expected rental income from the present house is about Rs20,000-22,000. I need a monthly income of Rs1 lakh after retirement. At what age can I retire with these investments? Don’t factor salary hikes for the next two-three years.
—Kaushal Desai
Assumptions: Your annual savings has been taken at Rs7 lakh.This is considered excluding the insurance premiums. In addition, the savings will increase by the amount of rent from the fourth year onwards.
The savings are expected to increase further from the fourth year by 7% year-on-year. Inflation is also assumed to increase at the same rate, i.e. 7%, and the interest rate is taken at 10%. This is considered as an average rate over the long term. We have taken your working life span as 22 years.
Financial planning: The total net worth (excluding real estate) at 58 years is Rs4.81 crore. This amount is available after providing for your new house and son’s education.
The inflation-adjusted new house will cost you Rs1.31 crore where we have assumed a loan at 60% of the said value and have considered the average rate of interest at 9.5% for a tenor of 15 years.
The net worth mentioned above is meant for your retirement. You attain the critical mass in the year when the retirement expenses are higher than the interest earnings, at the age of 69. This is the year from when you start withdrawing from your principal corpus.
This corpus will last you till the age of 80. However, if you believe that 85 years is the optimal age, then you need to increase your saving years by one, thereby increase your retirement age in the process by another year.
Another strategy could be targeting an annualized return of 11% against the current target of 10%.
Things to watch: You have a PPF account in the name of your son. Make sure the total contribution in both the accounts does not exceed the limit of Rs70,000 per year in case you are the guardian of his account. Also, review you stock portfolio. If you are an investor who keeps a regular watch on the markets then you can continue your holdings. Otherwise, you will be better off by switching to mutual funds.
Queries and views at mintmoney@livemint.com
To read full response, go to www.livemint.com/inflationretirement.htm
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First Published: Thu, Jan 20 2011. 10 22 PM IST