Retirement planning usually starts with a simple question: how much money is enough? The problem is that most people don't have a clear answer.
A retirement corpus that looks comfortable today may not feel nearly as large 20 or 30 years from now. Inflation, medical cost inflation, and longevity may all work together to increase your ultimate goal.
However, there is some positive news. Estimating a target for retirement does not have to be overly difficult. It is unlikely that any guess will ever be entirely right. However, with a little calculation, a reasonable figure can be found.
One such assumption that people often make is that the current level of expenditure will not change post-retirement.
But, this is not true because some expenses might reduce. For instance, EMI on homeloans,cost incurred for children’s education, among others. At the same time, healthcare, travel and leisure spending could increase.
A practical starting point is to estimate how much you would need each month if you retired today. That gives you a base figure to work with before adjusting for inflation.
This is where many retirement plans fall short.
What appears to be an affordable expense in the present may be quite a different picture in another 20 years. Inflation may have a steady effect even if it is only moderate.
This means that an expense of Rupees 45,000 per month in the present may escalate to much more than Rupees 1 lakh after 20 years if inflation is about 6percent every year.
Ignoring inflation can leave a significant gap between what you expect to need and what you actually require.
Don't underestimate how long retirement can last
People are living longer than previous generations. Someone retiring at 60 may need their savings to last 25 years or even longer.
That changes the retirement equation considerably. The corpus has to support day-to-day expenses for decades, while also providing a cushion for unexpected costs.
Healthcare deserves particular attention. Medical expenses often rise with age and can become one of the largest costs during retirement.
Turning expenses into a retirement corpus
Once you estimate your future annual expenses, the next step is calculating the corpus required to support them.
Many financial planners use a withdrawal-rate approach. The idea is that only a small portion of the retirement corpus is withdrawn each year while the rest remains invested.
For example, if future expenses work out to roughly Rupees 17 lakh annually, a corpus of around Rupees 4 crore to Rupees 4.5 crore may be required, depending on assumptions around returns, inflation and withdrawals.
The exact figure will vary from person to person, but the exercise provides a useful benchmark.
The retirement corpus you need to build is not the same as the amount you need to save from scratch.
Your existing EPF, NPS, PPF, and other investments will form part of your retirement corpus itself. Analysing such investments will help you find out how much more money needs to be saved by you during your working life.
Regular savings and increasing the amounts of savings with increase in income will help you to overcome this shortfall.
Retirement savings is not an exercise in finding out a precise figure but a way of being ready for the future by making certain practical assumptions.
The earlier you plan for your expenses, consider the inflation factor, and analyse your savings, the better options you will get.
Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
Discover the latestBusiness News,Sensex, andNiftyupdates. ObtainPersonal Financeinsights, tax queries, and expert opinions onMoneycontrolor download theMoneycontrol Appto stay updated!
Find the best of Al News in one place, specially curated for you every weekend.
Stay on top of the latest tech trends and biggest startup news.