A couple of days back, one of the leading financial newspapers had a detailed article on the captioned subject including the method to calculate your required retirement corpus. One of my very close friends did so and was shocked to find that for her the amount worked out to be close to Rs 6 crores; far more than what she had expected. With this revelation comes the next worry – of finding some way to save this amount.
Let us understand this in detail.
Why is the retirement figure always such a huge number?
The retirement corpus is arrived at by taking into account the life expectancy (a conservative estimate today is 80 years), the inflation (which has to be assumed to be 6-7 % pa) and the post retirement expenses which will be roughly around 70 % of the pre-retirement expenses (subtracting the children related/tax /commuting to work expenses and adding medical expenses).
So, basically this figure is the corpus you need when you retire which can generate a monthly income to take care of the estimated post retirement monthly expenses for the entire retirement period. The reason why this figure is huge is that here the principal amount is not supposed to be used at all – it is either kept for emergencies or for passing on to the next generation after the death of the owner and only the interest on this amount is used.In my friend’s case stated above her estimated monthly expenses in order to maintain the same standard of living post inflation after 20 years came to Rs 4 lacs. To generate this monthly interest assuming a rate of interest of 8 % p.a, the principal amount requirement is Rs 6 crores.
Also, all the figures taken into account are extremely conservative – It assumes that the person survives till age 80 or more and the inflation is at the constant high rate year on year. If you are eligible for a regular pension from your employer on retirement, it will reduce the future additional monthly requirement and hence bring down this principal amount.
How to save such a huge amount?
If you are young, unmarried and just started working – There is absolutely no need to worry, as you have all your working years to plan, save, invest regularly and benefit from the effect of compounding. Make sure you take adequate exposure to equities and take informed investment decisions with the help of a professional financial planner.
If you are young, married with small children – This is the stage where your monthly expenses increase. Along with continuing with your regular investments, you also take insurance and health policies for your family to avoid dipping into your savings in case of any contingency or health related ailments. Also invest in a house for self occupation at this stage if you haven’t done so earlier as you have enough years till retirement to slowly repay the loan.
If you have a few years left to retirement- Hope fully your children should be on the verge of completing their studies or starting work and you should have your own house by now. Make sure you are adequately covered by a comprehensive health cover which covers you till old age. Now-a-days, whole life policies are available which provide health cover for life. Take one if required, as you may not be eligible for one after this point in life. Continue saving for the future with the optimum mix of equities and debt in your portfolio.
If you have retired – This is the stage where you should have the required amount saved the interest on which should meet the regular expenses. However due to some reason, if you have fallen short of accumulating this figure, reverse mortgage is one option which can be considered. In reverse mortgage, your house, which is your primary asset is mortgaged and its market value is treated as the principal amount which is paid out as a monthly to you as long as you live. It is advisable to still have a small exposure to equities so that your savings is able to beat inflation.