One of the main goals of personal finance is to build a retire corpus which you can outlive. Like earlier generations, going forward very few people will have the luxury of pension. So the onus of building a retirement corpus will be on individuals. But before delving into “how to build the corpus?” one needs to find out “how much is good enough?”.
Retirement corpus that you would need is a function of:
- Current expense: Your current expense gives an indication of what you would need to meet your expenses during your retirement. Since in your retirement you wouldn’t have any active income, inflation adjusted value of your current expense is the amount that your retirement corpus would have to generate for you to meet your regular expenses.
- Years till retirement: This is the period from now till you plan to retire. In this period you would have active income (from salary, business etc.) which has to be used to create the retirement corpus. It is the “accumulation phase” wherein you accumulate corpus for your retirement.
- Years in retirement: This is the “consumption phase” wherein you would consume from the retirement corpus to finance your regular expenses post retirement. How do you find out the numbers of years that you would spend in retirement? Calculated guess with bias on the upper side. Better health-care and standard of living has improved life expectancy significantly. While this should be good news for all, people unprepared for retirement will find themselves in quite a fix. Today it is very come for people to have a retirement period of 25-30 years beyond the usual retirement age of 60. Another pointer – life expectancy of your close relatives (parents, grandparents) would also give you some idea.
- Annual inflation during retirement: This is another figure that you will have to assume. If you are not aware of what mehngai (inflation) can do to your corpus, I suggest you listen to “Mehngai Dayain” song from Peepli [Live] released recently. The lyrics goes something like this ….
Sakhi Saiyan to khube kamat haiFor now inflation can be assumed to be around 8-10%.
mehngai dayan khaye jaat hai 2
har mahina uchhle petrol
deisal ka uchhla hai role
Sakkar bhai ke ka bol
Roosa baat maati dhaan hamari jaan hai
Mehngai dayan khayat jaat hai …
- Rate of return on investment during retirement: This is the rate of return (RoR) that your retirement corpus can generate when invested. During retirement, it’s better to invest in low to medium risk channels like Senior Citizen Scheme, Fixed deposit, debt funds etc. RoR from these investments will be moderate in range of 8-12%.
Suppose a 35 year old has a monthly expense of 35 thousand. He wants to retire at 55 years of age and expects to like till 85 years. If we assume an inflation of 8% and RoR of 10% during his retirement period, the amount that he would need in his corpus to maintain the same living standard during his retirement is 4.55 crores. Yes you heard that right!
I suggest you play around with the calculator to find how much you would need.
“The journey of a thousand miles begins with one step”
Related posts:
No comments:
Post a Comment