HOW MUCH YOU WILL NEED TO RETIRE?
RETIREMENT PLANNING SHOULD START FROM THE DAY YOU START EARNING. IT’S SOUND ADVICE THAT ALMOST NOBODY FOLLOWS.
NO MATTER YOUR AGE, WORK PROFILE (SALARIED OR CONSULTANT) OR INCOME LEVEL, BELOW QUESTIONS WILL HELP YOU CALCULATE THE NEST EGG YOU NEED TO BUILD SO THAT YOU DON’T JUST RETIRE BUT RETIRE IN COMFORT.
HOW SPENDING PATTERNS CHANGE WITH AGE
Age makes a difference to your spending pattern. For example, education takes a lion’s share of expenses when you are between 30s and 50s and have kids. It falls to zero afterwards.
Unlike past generations, most modern urban Indians now spend a lot more on travel and recreation after they stop working full time. Hence, a higher allocation to these heads after age 60.
These relative shifts in expenses affect retirement corpus. You also have the option to not change your spending pattern after retirement.
CHALLENGES THAT REETIREES FACE TO MAKE RETIREMNET SAVINGS LAST A LIFETIME
LONGER LIFE SPAN
According to a report of the UN Population Fund, life expectancy at birth in India has risen from 60 years in 1994 to 69 years in 2019.
Lifespans are longer in urban centers with medical facilities and among socio-economic classes that can access them. It is not uncommon to see people in their 80s and 90s, and things will only get better in future.
As a result, the average upper middle-class urban retiree must have enough to last 20-25 years in retirement instead of 15-20 years earlier.
FALLING INTEREST RATES
Interest rates of fixed income options have come down and the investment landscape has changed drastically.
Fixed deposits are offering senior citizens around 6-7% returns. The Senior Citizens’ Saving Scheme, the most lucrative option for retirees in the small savings stable, currently offers 8.6% but this could soon change.
Small savings rates are linked to government bond yields and are reset every three months. With the 10-year bond yield falling sharply to 6.5% in the past three months, the government is likely to cut the rates on small savings schemes in the next revision.
This will allow banks to cut their deposit rates. Banks want to bring down their cost of borrowing but can’t cut deposit rates due to competition from small savings.
IS RS 1 CRORE ENOUGH FOR RETIREMENT?
If put into an annuity plan when the individual is 60 years old, the corpus can yield a monthly pension of about Rs 70,000 for life. But this option will not give the principal back to the legal heirs of the investor on his death.
If he wants his legal heirs to get back the principal amount of Rs 1 crore, he will have to settle for a lower income of around Rs 52,000 per month.
A pension of Rs 52,000 might be enough today but won’t remain so forever. Inflation pushes up your expenses with each passing day.
Even a moderate inflation rate of 6% per annum will take the monthly expense to Rs 90,000 a month in 10 years and to Rs 1.6 lakh in 20 years. In other words, in 20 years, the pension from the annuity will be able to purchase barely a third of what it can purchase today.
So, it is very important keep inflation factor in mind when you plan for Retirement.