Recently, we had written about ascertaining how much you need to retire.
The article explained how to realistically assess inflation, talked about different inflation rates for different expenses, discussed the conservative assessment of life expectancy and most importantly – the realistic preference of the kind of life you want to live in your golden years.

Once these figures are arrived at, they can simply be fed into the Retirement Calculator and voila! You know your magic number.

But now what?

This week let’s see whether this number is scary or not, and how to achieve it either way.

Let’s assume the case of Mr. Shah – our favourite fictional character.

Mr. Shah is aged 45 and currently is working with ABC Ltd. as a software developer. He is earning Rs. 1,25,000 p.m. He wishes to retire at age 55.

His current house hold expenditure is Rs. 50,000 per month.

Over and above this he requires Rs. 75,000 a year for an annual vacation with his family and Rs. 1,25,000 a year for medical  and other discretionary expenses. He wishes to maintain the same level of life-style post his retirement.

He has assumed his life expectancy as 85 years. His children are already educated and he has few other goals. He is adequately insured and has created a contingency corpus of 12 months of living expenses and is maintaining this corpus in liquid funds and partly as cash in the bank.

As he is nearing retirement, Mr. Shah is worried about how much corpus he is going to need and whether or not he will be able to build this corpus in his remaining 10 working years.
He has not focused on his retirement till date, but he has made some ad-hoc investments which he can use towards retirement.

 

Mr. Shah’s age	45 years
Retirement Age	55 years
Life Expectancy	85 years
Current Monthly Expenditure	Rs. 50,000
Annual Expenditure (Vacation)	Rs. 75,000
Annual Expenditure (Medical)	Rs.1,25,000
Inflation (household)	7%
Inflation (Vacation, medical)	10%
Corpus Required at retirement	Rs. 6,80,95,683

 

So now Mr. Shah knows he needs to achieve a corpus of Rs. 6.81crore to maintain his lifestyle in his post retirement period. The next question in Mr. Shah’s mind is to how to achieve this corpus. He is expecting to get gratuity of Rs. 25 lakhs (post tax) and expects his EPF maturity to be Rs. 1.08 crore at the time of retirement.

Over and above this, he has invested Rs. 12 lakhs in mutual funds (current value) so far and has allotted his ancestral property of Rs. 1.5 crore (current value) to his retirement goal. He also has Rs. 35,000 surplus savings per month that can be invested towards his retirement. The rest of his investible surplus is allocated towards other goals, such as his daughter’s wedding and regular new car purchases every 5 years.

How much will his total achievable corpus be at retirement? Will it be enough?

 

Gratuity at retirement	Rs. 25,00,000
EPF Value at Retirement	Rs. 1,08,00,000
Future Value of existing Mutual Funds (assuming 15% p.a. return)	Rs. 48,54,669
Future Value of Ancestral House (7% p.a. growth)	Rs. 2,95,07,270
Maturity Value of SIPs	Rs. 96,32,592
TOTAL RETIREMENT CORPUS	Rs. 5,72,94,531

 

So with all his existing assets and future investments to be made, Mr. Shah will accumulate a Retirement Corpus of Rs. 5.72 crore. This corpus is to be kept in a fixed income instrument and there should be no risk i.e. no equity exposure in these funds.

However, what he needs is a corpus of Rs. 6.81 crore.

Therefore Mr. Shah has a shortfall of approximately Rs. 1.09crore.

There are now 3 options in the above situation:
 

1. To post-pone his retirement by some time i.e. increase his number of earning years
2. To reduce his expenditure post retirement i.e. live within his means
3. To save and invest a higher amount today and going forward forward towards retirement, i.e. divert money away from other lower priority goals.
    

If Mr. Shah spends a little less on his daughter’s wedding, and buys new cars every 7 years instead of every 5 years, he is able to accumulate an additional investible surplus of Rs. 15,000 per month starting today. If invested into diversified equity mutual funds, this becomes a corpus of Rs. 41.79 lakhs.

Thus the shortfall reduces to Rs. 67 lakhs approximately.

It is also recommended that as and when Mr. Shah has any investible surplus by way of bonuses etc, he invests them towards his retirement corpus.

In such a situation, it is also important to reduce any ongoing discretionary expenses and contribute this towards the retirement corpus investments. For example, if Rs. 8,000 is spent on entertainment (eating out, movies, shopping, gifts, books and magazines, jewellery, mini vacations etc) on an average n a monthly basis, this can be reduced and the savings can be channelized towards retirement. So, by choosing one or all of the above solution options, Mr. Shah will be able to build the retirement corpus that he needs, to live his golden years in financial freedom.

Conclusion

The most important factor in planning for your retirement is to start as early as you can and contribute whatever amount is possible. Remember an additional Rs. 2,000 per month in an equity mutual fund today, becomes an additional Rs. 13.37 lakhs after 15 years (growing at 15%). The corpus that is built by the time of retirement can be invested into fixed income products and kept away from any market risk / volatility. It is important to note however, that upon the end of Mr. Shah’s 85th year, the funds will have been entirely utilized. Hence it is always better to assume a longer life expectancy and plan accordingly – rather than run the risk of outliving your wealth and then being dependent.

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Comments
swillyca@yahoo.ca Dec 16, 2011 You have the monopoly on useful information-aren't monopolies illegal? ;)
nmrsridhar@apf.co.id Nov 10, 2011 I may be wrong, but I don,t understand how the Corpus required works out to 6 crores. If we assume 5% and 10% as inflation rates for monthly expenses and Annual Vacation. at the end of 10yrs, these amounts will grow to 98,357 and 518,748 respectively. Then if we compute the Present value of  these figures of 98,357 per month and 518,748 per year respectively for 30 years , the corpus works out to 2,02,49,344. Am I missing something? pls info. regds
muralidharanplus@yahoo.co.in Nov 15, 2011 The planning considers that returns from market investment will be 15%. The problem is anyone guaranteeing this? Presently markets are doing so badly!
tsra123@gmail.com Nov 15, 2011 I do not understand why all financial planner scare the people with showing such large amount required for retirement. There are other options too like; 1. One can drop out many expenses on outside food, entertainment, travelling, expensive cloth etc when becoming old. 2. One even may move out from large cities to remote town or village and remain there with minimum expenses on living and with stress less atmosphere with clean air and water. In such place there no bomb explodes, no flooding, no traffic, no pollution of air and sound. 3. If some one develops the spiritual way of leaving, even eating food will be reduced to minimalistic and die peacefully.
anilagrawal1@yahoo.com Nov 15, 2011 The character chosen can be fictional, but not the assumptions. Sir, all your assumptions to illustrate your viewpoint, are practically not feasible. For example: A person at the age of 45, can not have "all children education completed status." He earns 60,000, has household expense 50,000, annual expenses of 2,00,000, which means he is living beyond means. Then how is he saving 30,000 pm? A person with monthly income of 60,000 can not have PF corpus of more than a crore. Likewise his gratuity amount cant be 25 lacs.

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