Why we need Retirement Planning ? When and how to proceed ?
Will your money last longer than you?
With rising life expectancy in India, it can be easily predicted that a person who retires at 60 may live for another 20 -25 years. And now comes the question, will your money last longer than you do? Most of us spend first thirty years in getting education and finding a suitable profession, hardly planning anything for the life ahead. Between the age of 30 to 50 people spend time raising kids and piling mortgage/ debt. And suddenly they realise what will they do now?
Unlike other developed countries such as USA, our country doesn’t have anything such as social security plan. Here we have to take care of our basic requirements on our own even after retirement. Most of us plan for goals such as buying a car/home, marriage but we hardly think of retirement.
The minimum you can plan about retirement is, sustaining your current living standard even after your retirement. And while planning the most critical aspect to consider is inflation. So how much you need to save and where you should invest? Answer to this question depends on your current expenses and savings, the age of your retirement and your investment style or risk appetite.
We have designed a simple retirement calculator which helps you know your retirement goal. It also helps you know how likely it is that you will attain your goal with current saving habit and investment style. You can refer to our article on asset allocation to find/choose your investment style.
Following is an illustration of how retirement calculator works.
Saurin is working with a software company. His age is 26 years. He earns Rs.35000/ month. His monthly expense is Rs.20000 and saves Rs.15000.He plans to retire at 58 years. As he is very young today his investment style is “aggressive growth”. Now feeding these data in to retirement calculator his requirement of retirement corpus is Rs.2,46,88,000. Following is the graph showing his final retirement corpus in case of average and poor market return. From the graph it is very clear that his goal will be met if market performs average. And it is falling short by Rs. 1 crore in case market performs poorly.
Here for these calculations we have considered annual growth income at 3.5% and inflation at 5% based on past data.
Based on this calculator if your retirement goals are not attainable then you should think of changing your saving and/or expenditure habit or investment style or both.
No matter what your investment style is, as far as retirement planning is concerned it is always beneficial to start as early as possible. Starting early gives you more time to save and invest. And the longer you invest greater is the power of compounding. It makes your goals more attainable and may be before your projected time horizon.
Any downturn or recession in economy near maturity of your plan may erode your wealth and fail your planning. So it is highly advisable to withdraw your investments before one or two years of your time horizon and shift it into a secured asset class such as fixed deposits.
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