New Delhi: With rising life expectancy and falling returns on fixed income products, retirement planning has become a difficult task as you have to accumulate a bigger retirement kitty during your working life that can fund entire expenses of your retirement phase. It will be easier for you to accumulate your retirement corpus once you know how much you need to have a comfortable retirement. Once you know the required amount for retirement then only you can prepare a plan to accumulate that corpus.
There are five factors which need to be considered while calculating your retirement corpus:
Number of years till retirement
The amount you need for your retirement is dependent on your retirement age and there is no fixed rule for deciding that. You may retire at the age of 60 or may retire early as you like. This solely depends on your priorities, liabilities and life goals. But what you need to know here is the longer you work lesser the amount you need as your retirement corpus. For example, if you decide to retire at 55 then your retired life will be 30 years assuming an average life expectancy of 85 years in India. In this case, you get less time to accumulate the corpus and also you need a bigger amount as well. This is possible only if you have high earnings and low expenses. Retiring early has its own challenges.
However, if you decide to work till 60, you need a corpus to fund 25 years of retired life and you get more time to accumulate that amount. So the burden will be less on you. So you will have to try different time frames to find which one suits you the best.
Inflation during accumulation phase
It has a major role to play in retirement planning as inflation can erode the value of money that you will accumulate by the time of your superannuation. Retirement is one of the longest life goals so if you don't factor inflation into your calculation, then it is certain that you will face misery in your golden years. If your monthly household expenses are Rs 50,000 now then it will rise to Rs 2.21 lakh after 25 years assuming an annual inflation rate of 6%. Experts say a moderate inflation rate of 5% should be taken into account while doing retirement planning.
Estimate your expected monthly retirement expenses
Once you adopt a particular lifestyle, it becomes difficult to compromise in that lifestyle even after retirement. So its is quite certain that expenses during retirement will be linked to your current household expenses. But the only relaxation is that you would not have to repay any loan or you don't have to pay for your children's education or marriage as you would have most probably completed these responsibilities before your retirement. So to find out your expected monthly retirement expenses, you need to take your current household expenses minus loan repayments, investment, education expenses and add an additional amount for medical expenses.
For example, your current income is Rs 1 lakh. Out of this amount, you pay Rs 35,000 towards all loan EMIs, and invest Rs 30,000 for your future goals such as retirement, children's education and marriage. So your household expenses come to Rs 35,000. If you deduct children's current education expenses and add an additional amount towards medical expenses, then the present cost of your retirement expenses will be Rs 35,000. Assuming that there are 25 years left for your retirement and an average inflation rate of 5%, you will need around Rs 1.21 lakh per month to meet your retirement expenses in the first year of retirement.
Rate of inflation during retirement phase
As your retirement phase will stretch over two decades, you need to take into account inflation during the retirement phase as well. Your expected monthly expenses at the age of 61 will not be the same as your expected monthly expenses at the age of 70. So you need to accumulate a corpus that will allow you to withdraw incremental amounts every year during your retired life.
However, the rate of inflation during your retirement phase will not be the same as what it will be during the accumulation phase. As India is a developing country, inflation for the next 10 years may remain around 6% but it will gradually come down with every passing decade as GDP growth will slow down gradually. So if your retirement is around 25 years away from now you may factor in an annual inflation rate of 3-4% for the first 10 years of your retirement and 2-3% for the second decade of your retirement and gradually it will consolidate around 2% in the long term. So accordingly make your calculations.
Expected rate of return during retirement years
The return on your investment during the retirement phase will not be the same as the rate of return during your accumulation phase as you can not invest in risky assets during that phase. During your accumulation phase if you take higher equity exposure by investing in mutual funds or by investing in NPS you can expect over 10% return on your investment. But during the retirement phase, you can not afford to take higher equity exposure; maximum you can take 25% to 10% equity exposure or nil exposure depending on your risk appetite.
Mostly you will choose instruments like Senior Citizens' Savings Scheme (SCSS), Pradhan Mantri Vaya Vandana Yojana (PMVVY), RBI Floating Rate Bond, Monthly Income Scheme (MIS) offered by mutual funds or fixed deposits during your retirement phase. At present these instruments are offering around 7% return. But 20-30 years down the line, returns from these instruments must have come down. So you need to assume a conservative return estimate of 4-5% on your investment during your retirement phase.