There are dozens of excuses that are used by people for not saving for retirement. And, they all sound good. In fact, you would probably have a few of your own excuses also. However, absence of a good retirement benefit system in India means you have to plan your investments carefully for your twilight years especially in the face of inflation and rising life expectancy.
Given the inflation rate, during retirement your expenses may be far higher as compared to your corresponding expenses during your earning life. It is therefore important to calculate roughly your estimated retirement expenses post inflation to avoid any surprises later and plan your investments accordingly.
To calculate the money you will need at retirement, first your average monthly expenses are to be calculated. Let’s assume it to be Rs.30,000 or Rs.3,60,000 a year. Add another Rs.40,000 as miscellaneous expenses and an annual total comes to Rs.400000.
If inflation is 6% and you expect to retire at the age of 60 (after 30 years), your annual expenses at the time of retirement will be:
Formula: E x (1+r) N
Rs. 4Lakh x 1.0630 = Rs. 22.97Lakh
Where R = rate of inflation, E = Yearly expenses, N = Years left to retirement
If your investments earn 12% annually in 30 years before retirement and the inflation rate is 6%, the real rate of return is 6% (12-6%).
So, the corpus required at the time of retirement would be “yearly expense at the time of retirement/real rate of return” (6% or 0.06)
i.e; Rs.22.7Lakh/0.06 = Rs.3.83 Crore
Let’s assume that if you live 25 years after retirement, that is, till 85 and the net inflation is 2%. The total corpus required would be 3.83Lakh x 1.0225 = Rs.6.3 Crore
All this means that in our working years, the burden of retirement savings weighs very heavily on us.
Now comes a million dollar question that how do we reach such a big corpus?
It is not impossible to plan for retirement, provided we start saving early and invest the savings wisely. An early start means you’ll have to save a lot less to create the same corpus. Calculations show that if a person starts saving at the age of 25, the monthly outgo will be Rs.9700 if he wants to build a corpus of Rs.6.3 crore at the retirement, assuming the rate of return be 12%. If he starts 5 years later, to build the same corpus he will have to save Rs.17800 every month.