FINANCIAL PLANNING: Keep money woes away after retirement

Each one's retirement age is almost certain unless you echo George Foreman's belief, "The question isn't at what age I want to retire, it's at what income." Retirement planning in all cases is imperative as money is an important source of sustenance.

The average life-span of an Indian is said to to 68.8 years. But you might live until 100–120 years of age. The increased lifespan will need a much bigger retirement corpus, forcing some to possibly think of increasing their working life to either fund the retirement corpus or their post-retirement life. If you are thinking on these lines then you may be in for a rude shock.

With more people entering the workforce than those leaving and technological development such as artificial intelligence, machine learning and data science, a lot of jobs will be automated a lot of jobs.

Given this, you may be left with a scenario where you need to fund your retired life-span of 25 to 40 years with passive income.

People are more aware about retirement, yet more is needed. The three most common mistakes/ attitude towards retirement planning are –

Underestimating retirement corpus – Most people between the ages of 30 and 40 years underestimate their retirement corpus pegging it at Rs 1 or 2 crore.

Procrastination – Most often people tend to prioritise goals not on the basis of their importance, but on the basis of time period. Goals in the near future are planned, delaying far away goals. Lack of knowledge is another reason for procrastination.

Depending on children – Most people desire to be financially independent. However, leaving it for later years can be fatal because as they approach retirement (50-60 years, distribution phase) they end up funding their children's higher education and marriage, leaving little for retirement. They are forced to depend only upon Employee Provident Fund (EPF) which may be insufficient. Depending on children to fund one's retirement should be the last resort, as we seen in scores of Bollywood movies. One that comes to mind immediately is the Hindi movie Baghbhaan starring Amitabh Bachchan, where he withdraws his retirement money against the advice of his manager. He insists that his four children will support him during retirement, but that does not happen.

Retirement planning

Getting the goalpost right – Ascertaining the correct retirement corpus starts with the first correct estimation of monthly expenditure. Second is factoring the expected inflation rate (most often we miss out the lifestyle inflation that comes with increased earning power) and third is the expected life expectancy.

Let me explain with an illustration: A 40-year old retiring at 60 years with life expectancy of 85 years, having monthly expenditure of Rs 1,00,000. The monthly expenditure at the time of retirement will be Rs 3.20 lakh, needing a retirement corpus of Rs 6.7 crore that can be achieved with a Systematic Investment Plan of Rs 70,000 per month.

Earlier the better – Using the same illustration for a 30-year old person, an expenditure at the time of retirement will be Rs 7.68 lakh, needing a retirement corpus of Rs 16 crore, requiring SIP of Rs 27,000 per month. The retirement corpus is higher, yet it requires a smaller SIP amount – the merit of starting early.

Beyond EPF – Do not depend on EPF alone for your retirement. Let EPF be the debt part of your retirement corpus asset allocation. Add the equity power to your retirement plan and ensure a self–reliant and fulfilling retired life. A 40-year old saving Rs 50,000 per month for retirement generating an additional return of 4% per annum will be richer by Rs 1.75 crore.

The writer is founder & CEO, Fincart