Home / Opinion / Take the road to retirement planning before it is too late

Life expectancy of people has gone up thanks to advancements in the field of medicine as well as consciousness towards fitness and wellness. We may very well end up pushing our individual envelope towards mid- or late-nineties. With most of us working from 25 years of age until we turn 60, surviving until 95 years of age would mean a proportion of 1:1 between our earning and post-retirement years. In these 35 years of earning, one has to plan for other goals besides retirement, such as for children’s education, their marriage, home, car purchase, funding expenses around fulfilling daily needs, whims and desires, and so on.

Retirement will hit all of us at some point in time. And it is much closer that it may appear. All of us would rather have our money outlive us than the other way round. Retiring from ‘working for money’ means that after retirement one has to live off assets accumulated during the pre-retirement or working years.

I have come across people (and they aren’t few in number) who are well in their 40s but are yet to start planning and building their retirement nest.

It is concerning to see people prioritize goals such as a lavish wedding for their daughter, for a house that is much bigger than what they need, or for spending unwarranted sums on vacations without a care for tomorrow over their retirement. This eventually means that in their post-retirement years, they will have insufficient funds, and may even have liabilities such as a home loan tenor ending just a few years before retirement, or not being able to pursue their dream of starting out on their own.

While most people strive hard to create or earn their money, not many are as careful about nurturing the money earned to keep it relevant in terms of its purchasing power.

Our retirement expenses are likely to balloon due to high inflation and our increased longevity. This, in turn, would mean that we would need to invest larger amounts of money, for longer periods of time at higher rates to accumulate the appropriate size of funds needed for retirement.

Let us take an example of two couples, one in their early 30s and the other aged 40 who haven’t started investing for their retirement yet. Inflation has been assumed at 7%; the pre-retirement distribution phase generates returns at 12% per annum and returns post-retirement are pegged at 8%. Also, it has been assumed that expenses during retirement will be 70% of today’s expenses (after being adjusted for inflation).

For someone currently spending 6 lakh annually ( 50,000 per month at 30 years of age), she will require around 32 lakh per year for her retirement at 60 years of age (this need will keep increasing at the rate 7% per year). Moreover, if she were to live-off her assets (which would grow at 8% per annum post-retirement) she must have at least 9.5 crore at 60. For building a corpus of 9.5 crore, she needs to invest around 27,000 per month for the next 30 years at 12% per annum returns. In effect, while planning for her retirement, she would require an amount that is more than 50% of her current expenses.

For a 40-year-old spending 1 lakh every month, she would need around 32.5 lakh per year when she turns 60 at retirement. This would require a corpus of 9.66 crore, which can be built by investing around 98,000 per month. In this case, the monthly investment required for creating the required retirement corpus is nearly equal to her current monthly expenses.

In essence, if you start to save for your retirement when you are 30, you would require around 50% of your monthly expenses for investments; and at 40 you will need to invest nearly the same money as you spend per month at the moment.

The story gets murkier if you are building your retirement nest using just your Employees’ Provident Fund or Public Provident Fund corpus—returns in these instruments are currently 8.7% per annum. Equity is a must and has to find space in one’s retirement plan. From April 1979 until date, the S&P BSE Sensex has delivered returns close to 17% per annum (excluding the dividend earned).

The two clear lessons that one can draw while planning for retirement are: start early and invest in equities. Starting later in life might get too late to catch up, and avoiding equities could leave you with returns lower than inflation.

If you haven’t started walking on the road of retirement planning yet, do get on before it is too late.

Deepali Sen is a certified financial planner and founder, Srujan Financial Advisers LLP.

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