Retirement planning is an important part of any financial plan and it is the best example of a long term financial goal. You need to plan for a corpus and for regular income post retirement. But how do you decide your retirement corpus? Is there a retirement corpus formula and what is the corpus required for retirement in India? The answer will be, “It depends” But let us throw in some numbers to understand the argument..
Understanding retirement corpus required in the future
Obviously, your future retirement corpus will depend on an extrapolation of your current expense level. For that you need to inflation your costs on an annualized basis. Here is how your retirement corpus plan will look like..
ParticularsCurrent CostFuture Value neededCurrent Monthly ExpenseRs.75,000 per month
Rate of inflation5% annualized
Time to retirement30 years
FV of Monthly Expenses
Rs.3,25,000FV of Annual Expenses
Rs.39,00,000Yield on Safe Liquid Funds6%5%Corpus required (30 years)(39,00,000 / 0.05)Rs.7.80 crore
In the above case, the person will require a retirement corpus of Rs.7.80 crore to maintain his current monthly expense at inflation levels. Inflation may not exactly be at 5% for all these years but that is a fair assumption. If your corpus of Rs.7.80 crore is invested in a safe liquid fund yielding 5% after 3 years, then it yields a monthly income of Rs.3,25,000 which is the future value of the current monthly outlay.
Planning for your retirement through SIPs
Considering that the individual has 30 years to retirement, how to approach the retirement corpus of Rs.7.80 crore and how to make money work effectively for you?
ParticularsInvest in Debt FundInvest in Equity FundInvest in ELSSCorpus requiredRs.7.80 croreRs.7.80 croreRs.7.80 croreTime to retirement30 years30 years30 yearsMode of targetingSIP in Debt FundSIP in Equity FundSIP in ELSSEffective CAGR yield9.50%15.50%18.50%Monthly SIP required to reach the targetRs.41,327 pmRs.12,512 pmRs.6,773 pm
The figure in red colour show how much you need to save on a monthly basis to reach the target corpus of Rs.7.80 crore over the next 30 years under different investment assumptions. There are 5 basic tenets that follow to make the best of your investment plan towards your retirement.
Five key takeaways from your retirement planning calculator
30 years is a long time for realizing sustained returns on equities. It would be actually a waste to put the money in debt funds when you have such a long time frame. In fact, the SIP will give you the power of rupee cost averaging and equities will give you the power of compounding. It is when these two combine that you get your best retirement plan.
When it comes to retirement planning, the biggest risk is the risk of not taking any risk. When you commit the funds to a debt fund for a 30 year perspective, you are taking on a big risk because you are not taking on commensurate risk. As the table above proves, taking a calculated risk through equities is the best way to plan a 30 year retirement.
Don’t try to use lump-sum investing. In fact, if you are into equity funds then you really can start off with a very affordable SIP per month. That is how the power of compounding works. When you do a SIP, you not only get the benefit of rupee cost averaging but you also get the added benefit of sustained wealth creation over a period of time. Additionally, it also synchronizes with your income flows.
The key is to pinch your flows to save more. A retirement corpus may look to be huge but if you plan your SIP across the right assets with calibrated risk then you can easily achieve your targeted corpus. You can treat your savings as your residual after your expenses are done and dusted. Your expenses should be the residual after your targeted savings are provided for.
The earlier you start planning for your retirement, the better it will be. That is because it not only allows you take the higher risk of equities but also ensure that the power of compounding works in your favour. Even if you start small, you must start saving early for your retirement.
The most important rule is that you must have a clear SIP that is targeted at your retirement. In fact, the best way to plan for your retirement is to tag a SIP specifically for this purpose. By working backward and keeping a genuine cushion, you can ensure that you save enough for your retirement.