We are living in an age where very few of us want to think about retirement leave alone retirement planning.
This is an age where jobs are not fixed or assured and you are likely to change jobs multiple times. In fact sometimes we change careers wholesale.
I know of a software engineer who now runs an adventure travel company. A Chartered Accountant (CA) working towards becoming a full-time artist.
I am sure you have heard of Boman Irani. He ran a photography studio before he made his name in acting with Munna Bhai MBBS.
As I see the future unraveling, there will be lesser fixed salary jobs available and more people will work on freelance and contract basis, offering their skills across multiple projects across companies.
I am personally doing multiple projects than a fixed salaried job. I don’t think I will ever retire.
So, why are we talking of retirement planning here?
Retirement – Should you care?
Retirement is that phase of life when you will probably not be actively employed (for various reasons including health, physical condition or pure personal wish) and hence rely on whatever you have saved to provide for your expenses.
You may not realise it but retirement is that period which commands the most resources to maintain an existing lifestyle. There is zero inflow of fresh money. All that you have collected so far will be now used to provide for your living expenses in post retirement years.
You have to provide for those years today so that you do not have to worry then. And that is why retirement planning. Actually, post retirement planning.
With that objective in mind, here are 5 things that you have to think about .
#1 When do I want to retire?
10 years, 20 years, 30 years, never! Well, frankly, most of us want to retire ASAP, as soon as possible. And then go travel the world, pursue our hobby, write that book, or live in the mountains.
Unfortunately, there is a lot about life that is beyond our control. Jobs, income, physical health, etc.
How much of them can you really control? But you still need to have a number in mind to work towards? Will you retire in 10, 20 or never years, whatever! You will know why, in a while.
#2 How much expenses will I have?
This is not just the groceries or household help. The bigger items, in retirement, would come from medical and health related expenses. If you are relatively younger, travel expenses would be a big item. Don’t ignore them.
To begin with you can take today’s values of the expenses. But, you know, inflation will add to the bill. So appropriately adjust the expenses upwards to account for the hidden tax.
For example, if your monthly expense bill today is Rs. 50,000 and prices increase (inflation) every year by 8%, then in 9 years you will need Rs. 1,00,000 to buy the same things. I used the Rule of 72 here.
You should know your expenses, and the inflation rate that you see is applicable. 8% is reasonable rate to assume. It could be higher. You get the idea, right?
#3 What is the fund that I will need to fund these expenses?
Once retired, you will need the money flowing in every month, every year for about 20 to 30 years or more of your remaining life span. And prices will continue to increase too.
Here’s an example. Assume you are 35 today and you want to retire at 50, which is 15 years from now. Your currently monthly expenses are Rs. 50,000 per month. You expect to live till 80 (actually you should plan for 100 years). Assuming inflation now and post retirement is at 8%.
The returns that you will get for what you invest today is at 10% and then after retirement to generate regular income would be 6%. I have assumed zero investments till date.
At age 50, you will need Rs. 7.7 crores to fund 30 years of retirement, which translates into Rs 1.85 lacs of investment per month or Rs. 22 lacs of investment per year. Whoa!
#4 How do I plan to build that fund?
OK, so we now have an estimate of the investments that we need to make to get towards the idle, sorry ideal, life. The question that emerges now is – where?
Maxmise investment into Employees Provident Fund or the New Pension Scheme now, buying a Money Back, Endowment or Whole Life insurance policy, or for that matter a ULIP, buying property for rental income does not look like a solid plan.
While each one of them can be important, they have to be a part of a strategy than just random pieces picked up as you went about shopping.
Most of them will just protect the value of your money, they will not grow it. And what you need is growth, especially with the example we took in the previous question.
What is important is to take a piece of paper and write down an asset allocation that delivers the kind of return that we have assumed, 10% in this case. How much will you invest in equity, fixed income or debt, real estate and gold?
Did you know – 90% or more of your portfolio return is controlled by your Asset Allocation?
Only once the asset allocation is decided, you should then proceed to buy individual investments. Keep your eyes on the allocation.
#5 Do I want to make some adjustments?
Well, it might just be the case that retirement at the age of 50 may not look like a possible scenario for you. At least the numbers may suggest that. Hence, you may like to revisit your assumptions.
What if you plan to retire at 60? The number or years you need to provide for are only 20 and the working years increase by 10, double bonanza. In this scenario, you will need Rs. 10 crores at the time of retirement, but you will need to invest Rs. 75,000 only per month or Rs. 9.3 lacs per year.
The pressure comes down a lot. Similarly, assumptions of inflation rate, rate of return on investments, life expectancy, can also make a difference. There are several calculators on the internet that you can use to play around with these numbers.
Note: If you are a member of Insider Plus, use the Comprehensive Goal Planning workbook to have a full view of you financial life.
The bottomline though is that the more years you have available to work and earn, the lesser the pressure on building your retirement fund.
Looks like my decision to ‘never retire’ is in well thought. 🙂 Having said that, I should not discount the factors I can’t control. Planning is required.
Remember, “I don’t plan to retire” does not count as your retirement planning.
Between you and me: Which one are you? “I don’t plan to retire” OR “I want to retire in 10 years“. How are you approaching retirement planning? Would love to read your feedback and questions.