How much do you need after retirement? Quite often, the question will draw blank stares from people. Most of us do not understand the basic concept of retirement planning and what we are planning for. In the old days, government servants had it quite easy. They would retire and then get a pension from the government all their life. Retirement planning was really not a major concern for them. But that is not the case today. We all live in uncertain times and we need to provide for our post retirement life. How to go about it?
Putting down some numbers for a retirement corpus
Let us assume that Rakesh is 30 years of age, just married and foresees a good 30-year career ahead of him. He is currently earning Rs 80,000 per month and is able to save 25,000 each month after considering monthly commitments. Over the next 30 years, Rakesh will face inflation each year and let us assume that the rate of inflation will be 6%. That means at the time of retirement, his monthly expenses will be around Rs 3.16 lakh per month. Assuming that he will also be spending on lifestyle expenditure, let us assume that Rakesh will require Rs 4 lakh per month after he retires just to maintain his regular expenses.
Obviously, the retirement corpus cannot be invested in risky instruments. So, Rakesh will have to put the money in something safe like liquid funds. Let us assume that liquid funds will continue to generate 6% returns per annum. Monthly expense of Rs 4 lakh will mean an annual expense of Rs 48 lakh. Therefore, the corpus must be (Rs 48 lakh / 0.06), i.e. Rakesh will require a minimum corpus of Rs 8 crore on retirement at the age of 60 to generate Rs 4 lakh per month in a safe and secure manner. The big question is: how to create a corpus of Rs 8 crore by the age of 60?
So, how to go about creating a corpus of Rs 8 crore in 30 years?
Rakesh needs to start investing through an SIP (Systematic Investment Plan) to reach his retirement goal. Here is what needs to be done:
Goal | Years | Yield | Monthly SIP Needed |
Want to reach Rs 8 cr | In 30 years | At 14% CAGR yield | Rs 17,393 per month |
Want to reach Rs 8 cr | In 30 years | At 15% CAGR yield | Rs 14,205 per month |
The truth is that Rakesh does not have to do anything adventurous. Normally, equities can give you returns of 15% CAGR (compound annual growth rate) over a longer period. Even if you conservatively assume that you only earn 14%, Rakesh will need to save just Rs 17,393 per month. It is just that he will have to start off on the equity SIP immediately and have the discipline to sustain it over 30 years. Is Rakesh retirement ready?
Rakesh now have a bigger question. His Rs 8-crore corpus will only cover his retirement. Can he squeeze his child’s marriage and his child’s education also through this Systematic Investment Plan? The answer is ‘Yes’. What he needs to do is to structure the retirement payouts as a systematic withdrawal plan (SWP). The SWP will work in such a way that between the ages of 60 and 85, Rakesh will withdraw the entire corpus invested in liquid funds. Through this, he can withdraw only what is required and also he can cover his child’s education and marriage. That surely is like hitting two birds with one stone.
Hey wait, did he forget life insurance?
Rakesh has an endowment life cover of Rs 25 lakh, which is inadequate. Let us understand why! God forbid, if something were to happen to Rakesh, his family will get this corpus of Rs 25 lakh. Since it is an endowment policy and with bonuses the family could get around Rs 35 lakh. If you invest the money in liquid funds at about 6% the family will be able to get just Rs 210,000 per annum or Rs 17,500 per month. That is inadequate considering the current income levels. To replenish his monthly expenses he needs a life cover of at least Rs 3 crore so that the monthly income of Rs 1.50 lakh can take care of the family for a good number of years. To take care of outstanding home loans, the cover can be scaled up to Rs 4 crore. The first thing Rakesh must do is to surrender the endowment policy and use the premium saved to take a pure risk cover for Rs 4 crore. Also, a medical floater for the family is an absolute must!
How Rakesh realized mid way that his retirement corpus was falling short…
Rakesh’s retirement plan looks almost picture perfect. He has taken care of almost everything, including long-term wealth creation, payouts and insurance. What else could go wrong? Actually there are two possibilities.
# Let us assume that you have only invested Rs 10,000 per month instead of Rs 14,205/- per month in an equity fund that yielded 15%. Do you know how much short of the target you would be at the end of 30 years? You would actually be short of your target by Rs 1 crore.
# Alternatively, what would have happened if you had invested the money in a liquid fund (earning 6% per annum) or debt fund (earning 9%) per annum? How much short of your target would you be in 30 years? In the case of liquid fund, you will be short of Rs 6.50 crore and in the debt fund you will be Rs 5.40 crore short of target. For long- term wealth creation, always focus on the power of equities.
When you find that your investments are insufficient for the goals, you can scale down your future goals or increase your target monthly SIP investments. That is why regular monitoring of your goals against interim milestones and appropriate rebalancing becomes so vital.
(By Ketan Shah, Chief Revenue Officer, Angel Broking)
