As a part of my client engagement for financial planning and investment advisory, one of the key goals that is discussed and planned for is retirement.
Typically, retirement has been the most undervalued goal. It never seems like a priority.
Recently, in my latest engagement, I was working on calculating the retirement needs of my client – let’s name him Deepak.
Deepak is in his early 40s, in a well-paying job, expected to do well in the future too. He wants to ensure that he can provide enough for his daughter’s education and his own retirement.
“When do you want to retire”, I ask.
“At 55 age”, was the immediate reply.
“OK, let’s work this out.”
As I worked out the numbers, I saw something terrible. With the current situation, Deepak cannot retire by 55. In fact, he might have to well carry on working till over 65 years of age.
I am working with Deepak to find out the best solution to help him reach his goals. With some adjustments to his portfolio and investment habits, it would be achievable.
So, that was Deepak.
But wait, don’t I need a retirement plan for me?
The question started haunting me.
What about my retirement? Am I ready to walk into the sunset years where I can enjoy my financial freedom?
I was not sure. The thought sent a chill down my spine.
I now need to know where do I stand and what is required to get my retirement planning right.
Retirement Planning for Me
You see, awareness is the first step towards creating change.
So, I began with the data. For the purpose of retirement planning, I worked with the following questions:
- What income do I expect per month during my retirement years? This should include all expenses on household, health, travel, etc.
- What income would I expect to get from any other sources like rent, pension, etc.?
- Net, Net of the two above, what is the remaining income I need to plan for?
- How much will the prices rise, inflation, that is? Yes, the inflation demon, is there with you forever.
- A big one – what is my life expectancy? How long do I think I will survive on Planet Earth?
I used a calculator in an excel file to do this. I am sharing that calculator with you too, later in this post.
So, here is what the numbers look like.
A few observations:
- I have currently taken a monthly income need of Rs. 75,000 per month to meet retirement expenses. But retirement needs change over time. I am sure in a few years, I would need Rs. 1 lac per month. This is not necessarily because of inflation only but also because of the change in my consumption basket too.
- I have assumed the inflation to be fairly normal at just 8%. It could be higher over time.
- As you see in Me 1 scenario, I have assumed a post retirement investment return of 8.5%. That too because I am assuming that I would put 40% of my retirement money in equity and 60% in fixed interest yielding investment. Even with that kind of return (8.5%), I would need, based on today’s income needs, a whopping Rs. 11 crores.
- I should actually be conservative and plan for a 6% return, may be (Scenario Me 2). That would increase my requirement by almost 30%, to about Rs. 14 crores.
- Like all good people, I want to retire early too. So, in scenario Me 3, I assumed retirement at 55 years. With that assumption, I would need about Rs. 12.5 crores to meet my retirement expenditure. Of course, I have also kept my return expectation reasonable, at 6%.
- What if you live more than you expected? I have assumed a life expectancy of 80 years, but what if I have an extended stay on Planet Earth? Ah! that’s going to be interesting.
So, this is the understanding of what I would need at the point of my retirement. But there are bigger questions lurking around.
What do I need to do to create this retirement fund? How much savings will I need to make per month or per year to build this fund?
Let the numbers do the talking.
For the purpose of this calculation, I have assumed a investment return of 10%. That is typically our portfolio return with all the EPF, PPF, Bank deposits, Pension Plans, etc. (Do an acid test for your investment portfolio here.)
So, all was well till I calculated the funds required for retirement. The real shocker has come in now.
Now, as you can see, even for the optimistic scenario of Me 1, I need to save about Rs. 87k per month for the next 24 years to be able to accumulate Rs. 11 crores.
And if I be more realistic with post retirement returns at 6%, I need to save Rs. 1.13 lacs per month.
You know I am not even looking at the possibility of retiring early.
Critical Retirement Planning lessons for me
Yes, here are a few important reminders which I should ensure over time.
- Improve investment return by at least about 1% to 2%. This would bring down the investment requirement significantly. At a 12% rate of return, I need to save Rs. 61,000 in scenario Me 1 and Rs. 80,000 in scenario Me 2. Typically this can be achieved by changing the asset allocation a bit. A larger portion of savings (almost 80%) has to go into stocks or equity mutual funds.
- The sooner and more I start to invest towards retirement, the better it is for ‘Me‘. As the years pass by and if I don’t provide enough, retirement could only become a distant dream. Else, I would have to settle for a lesser lifestyle than I am currently used to.
- I have to review my retirement plan regularly and adjust it for any changes including evaluating my asset allocation and my specific investments. I have to keep a watch that I am making adequate progress towards it.
Retirement Planning for You
So, where do you stand on retirement planning for yourself? Test out the numbers for yourself. Sure. I would like to be of some help.
I am sharing here the same calculator which I used to do calculations for my retirement need.
It is an excel workbook. All you have to do is download it on your computer, open it and input your numbers in the yellow coloured cells only. The required output will be generated automatically. The formulae are in place.
Work with multiple scenarios to understand various possibilities about your retirement.
The retirement planning calculator is now updated. Read more and download the improved version here.
What do you see? Do share your observations and learnings with me. That’s the only thing I ask for.
Remember, whatever the numbers might be, with the right planning and focus, you can reach your goal.
I discussed with Deepak about the possibilities with his retirement planning. He now feels confident that he will reach his goal.
Between you and me: Have you ever thought of retirement or planning for it? What’s your approach? Would love to learn from you. Shoot an email or write in the comments below.