How to plan your retirement?

Financial planning provides direction and meaning to your financial decisions. Retirement planning is extremely important because the quality of life for a large part of the later years depends upon the kind of retirement planning undertaken. With current scenarios of sudden changes in the environment and emerging of different technologies, various risks such as higher inflation rates or higher life expectancies can be seen with which, the corpus cannot last long. Therefore, it is very important for an individual to plan his/her retirement especially finances during that time period.  

If you just earn & spend and intend to continue this cycle, till the time you retire, you will be left with no money! You haven’t come across any sort of financial problem yet because you are earning but have you thought about what will happen after retirement? When you won’t be earning, you won’t have any money to spend your remaining retirement life. The inflation of India is 5.52 per cent, which will be rising with time, eating up all your purchasing power. The majority of people don’t have a plan for retirement, which leads to a financial crisis.  

Now the question arises that what nest egg will be required at the time of retirement. So, to answer this, see the example below using MS-Excel: 

Following are the components required to calculate the corpus required at the time of retirement-  

a. The number of years you have till retirement i.e., your retirement age-current age. Suppose your current age is 30 and considering you choose to retire at 60, then you have 30 years till retirement (60-30=30 years).  

b. The desired monthly expense during retirement- Suppose your current expenses are Rs 1,00,000 p.a. and you want to maintain the same standard of living during retirement, then your monthly expense during retirement will be the same.   

c.Inflation rate during accumulation phase- Since your current expenses are Rs 1,00,000 p.a. and you want to maintain the same standard of living during retirement, this Rs 1,00,000 won’t be sufficient to cater to your expenses as inflation is increasing; so, if Rs 1,00,000 will grow with an inflation rate of 5 per cent till retirement, then the expenses at the time of retirement will be calculated as:  

d. Rate of inflation post-retirement- This rate is fluctuating and hence, might be different in the retirement phase than in the accumulation phase. Let’s say, it changes to 6 per cent. 

e. Expected rate of return post-retirement – In the initial years of life, the risk-taking capabilities of an individual are higher than the post-retirement phase. In the former case, they can invest in equity while post-retirement, their risk-taking capability decreases. They invest in quite low risky instruments like FD, NPS, etc. which gives a lower rate of returns, say 7 per cent.  

f. Life expectancy- The life expectancy of an individual is considered to calculate the retirement years. Let’s say, life expectancy is 80 years and retirement age is 60, then retirement years would be 80-60=20. Then, corpus will be calculated as follows:

Formula of the Real rate of return= (Actual rate of return-Inflation rate of return)/(100+Inflation rate)

So, you will need Rs 79,17,809.45 as corpus at the time of retirement.  

Now, to achieve this corpus, you will need to invest in instruments that align with your goal. For eg: you invest in an instrument that provides 12 per cent, then you have to invest approx. Rs 30,000 to achieve this goal. 

Suppose you invest at 12 per cent to achieve the target.

So, you need to invest Rs 29,293 to achieve the corpus computed.  

This is how retirement planning is done. In order to achieve retirement goals, investors need to be patient and focussed on their retirement goals.