HOW MUCH DO YOU NEED TO RETIRE?
To arrive at the sum you need, you have to factor in expenses when you retire, years you have left to save and how much you require to save
➘ UNDERSTANDING RETIREMENT NEEDS
Is Rs 1 crore enough to retire comfortably? To accumulate Rs 1 crore, you need to invest Rs 15,000 a month for the next 15 years in an instrument that earns 15 per cent returns. Now, this monthly investment could go up if the investment earns lower return or when the time to reach this goal is shorter than 15 years. However, savings towards retirement is not about how much money you accumulate, it is about how much income you will draw from the retirement savings to manage your retired life.
Suppose you retire today with Rs 1 crore and need Rs 25,000 a month for the rest of your life; you can draw this sum without the corpus having any gains for about 34 years. However, life is not that simple, there are several factors that you need to consider when calculating the sum you will need each month when you retire. Inflation, taxes and increase in expenses under new heads are some of the aspects that you need to consider. You need to keep the corpus invested in an instrument which matches your risk profile and tax efficiency. So, the most common goal to accumulate Rs 2 crore or Rs 5 crore is illogical and has its share of faults.
➘ HOW MUCH YOU REALLY REQUIRE?
For someone in their 20s, it is impossible to know how much they will need when they retire at 60. With rising longevity, it is difficult to precisely arrive at the number of years they will need the money for, the state of their health and other financial commitments that they may have when they retire. To make a start, one should start investing towards retirement as early as one starts to work. As part of the formal workforce, one contributes towards NPS (National Pension System) or the EPF (Employee Provident Fund), which is targeted towards retirement savings. Both these are long term instruments in which one could save and invest for the long-term towards retirement.
Considering the long time to reach retirement, one should allocate much of the investment towards equity-oriented instruments such as mutual funds, stocks and even the equity funds within NPS. This way, the small contributions have the prospects to grow over a 20-30 year time frame. An individual investing Rs 5,000 a month for a 30-year period, earning 12 per cent returns accumulates Rs 1.74 crore. However, the same investment over 25 years, with the same returns accumulates only Rs 94 lakhs, taking away the opportunity for compounding to work with the additional five years.
As you approach retirement, say five-seven years before you actually retire, you will be in a better position to assess how much money you need each month when you retire. If you are close to achieving this target, you can make some changes to your last-mile investments to reach the sum you need. If you are way off target, you could reassess your retirement date and postpone it by a few years or increase your investments towards retirement.
Funding retirement is tricky, because you stare at the prospects of having funds to last you a 25-30 years, with several financial factors in play which are not easy to comprehend. Make it a priority, and review it frequently 10-12 years before you retire. Make changes to your lifestyle expenses today, to have a safe and secure retirement in the future. ■
ONE SHOULD ALLOCATE INVESTMENT TOWARDS EQUITY ORIENTED INSTRUMENTS LIKE MUTUAL FUNDS, SO IT CAN GROW OVER TIME