Retirement Planning Series - Conclusion

We have come to the end of the Retirement planning series. So far, we have covered the following:

1. Why plan for Retirement? and
2. How much money will I need?
3. Where will the money come from?
4. Building the Retirement Corpus


While it's impossible to learn everything you'll ever need to know about retirement planning in a single article, the topics we have covered in this series should give you a solid start.

Retirement planning is an ongoing, lifelong process that takes decades of commitment in order to receive the final payoff. The idea of accumulating hundreds of thousands of rupees in a retirement corpus can definitely seem intimidating, but as explained in my articles, with a few basic calculations and commitment it's not difficult to achieve.

Let's revise what we have covered so far:

• Every individual is responsible for planning for his/her retirement
• How much money you'll need to save for retirement will depend on your desired standard of living, your expenses and your target retirement age.
• To determine the size of the retirement corpus, you'll need to:

o Decide the age at which you want to retire.
o Decide the annual income you'll need for your retirement years.
o Add up the current market value of all your savings and investments.
o Determine a realistic real rate of return for your investments.
o Obtain an estimate of the value of your company pension plan.

• Assume that an annual inflation rate will erode the value of your investments and adjust your savings plan accordingly to provide yourself with a margin of safety.
• Income during retirement may come from the following sources:

o Employment income,
o Employer-sponsored retirement plans,
o Savings and investments,
o Other sources of funds, including inheritance money, prizes and lottery winnings, gifts, raises, bonuses and real estate.

• There are several investment options that can be used to achieve your retirement savings goals. These include, but are not limited to

o Bank Deposits
o Stock Market Investments
o Gold
o NSC, PPF etc

• Beginning to save for retirement at an early age is one of the biggest factors in ensuring success.
• Asset allocation is a key factor in building any successful portfolio. The assets you choose will depend on your risk tolerance and investment time horizon.
• Diversification will help you to reduce the amount of risk in your portfolio, increasing the chances that you'll reach your retirement savings goals.
• Make a household budget to ensure that you are contributing as much as possible to saving for retirement and aim to reduce unnecessary expenses

Other Considerations:

1. Remember that most investment options have tax implications
2. Make sure to factor in the amount of tax you may have to pay on the income earned through your investments (don't worry, you can find out the tax implications of the investment options in my blog in the various articles and if you cant, just leave a comment and I will get back to you)
3. Make sure to revisit your retirement plans at the end of every 2-3 years and make adjustments if required
4. Make sure you re-jig your portfolio at the end of every decade. As you progress in age, your risk capability comes down and moving from an aggressive portfolio to a conservative portfolio is a must for any individual who wants to preserve his capital around retirement age


I hope this retirement planning series was useful to you. Do leave a comment if you have any queries and I will try to answer them.

Happy Retirement Planning!!!

Retirement Planning Series - Building the Retirement Corpus

In the previous posts in the retirement series, we saw the following:
1. Why plan for Retirement? and
2. How much money will I need?
3. Where will the money come from?

The next logiccal step in the sequence would be to actually build the retirement corpus. In India, there are a myriad of investment options that are available. The most common ones are:

1. Bank Fixed Deposits
2. Stock Market Investments (Shares & Mutual Funds)
3. National Savings Certificate
4. Public Provident Fund
5. Unit Linked Insurance Plans
6. Gold
7. etc

As part of building your corpus, you are essentially building a portfolio of investments that you can use to fund your retirement. I have written multiple articles that can help you with that. They are:

1. Saving Taxes through Investments
2. What is an Investment Portfolio
3. A Conservative Portfolio
4. An Aggressive Portfolio
5. A Balanced Portfolio
6. Unit Linked Insurance Plans – De-Mystified
7. Life Stage based Portfolio

I would personally recommend that you read the last one on Life Stage based portfolio that advises on how you must plan your investments as you move on from one stage of your life to another. The stages considered are:

1. Single - Young and energetic
2. Just Married - Settling down with a new family
3. Expanding your family - Becoming a parent
4. Matured Individual - Children are grown up
5. Nearing Retirement - Old and wise

It is a good idea to begin investments early, and choose the Aggressive portfolio when you are young and move over to a balanced portfolio post marriage and when you are nearing retirement, switch over to a conservative portfolio.

Retirement Planning Series - Where will the money come from?

In the previous two posts, we saw the following:
1. Why plan for Retirement? and
2. How much money will I need?

Now that we know why to plan for retirement and how much money we need, the next logical step would be to calculate or rather figure out, where that money will come from. Isn’t it?

Where will the Money Come From?

Though employment income seems to be the most obvious answer, there are actually many sources of funds you can potentially access to build your retirement nest egg. Once you plan them all out clearly, you can then determine how much money you'll need to save every month in order to reach your retirement goals.

The typical sources of funds for retirement savings for an average individual are:

1. Employment Income

As you progress through your working life, your annual employment income will probably be the largest source of incoming funds you will receive and probably the largest component of your contributions to your retirement fund.

For your retirement plan, simply write down what your after-tax annual income is. Then subtract your annual living expenses. The amount left over represents the discretionary savings you have at your disposal.

Depending upon how the numbers work out, you may be able to save a large portion of your employment income toward your retirement, or you may only be able to save a little. Be sure to use a budget and include all your recurring expenses.

Figure out the maximum amount of your employment income that you can contribute to your retirement fund each year. Also, if you are able to work part time during your retirement years, include this information in your retirement income calculations.

For Example: Lets assume Mr. Ramesh has an after tax earnings of Rs. 5,00,000 per annum (5 lakhs). His expenses per month are around Rs. 33,000/- per month which works out to nearly 4 lakhs per year. To add on, Ramesh isn’t planning to work post retirement.

So, Mr. Ramesh has an available savings of Rs. 1 lakh every year towards his retirement plan. He can choose to invest it for retirement or take a vacation or whatever he wants. But the point here is that, if Ramesh wants, he can invest this 1 lakh every year towards his retirement corpus.

2. Employer-Sponsored Retirement Plan

This option isn’t available for a majority of us. We are all private sector employees and our employers don't usually pay us post retirement. However for people who are Government employees and have a steady pension payment post retirement, this source of income is very useful.

You should be able to calculate an estimated value (in today's rupees) of your retirement funds in terms of a monthly allowance. Obtain this number and add it to your list of retirement income sources.

For Ex: Mr. Ramesh will get a pension of Rs. 10,000 every month if he retires at his current grade of Technical Supervisor in Indian Railways. So, this 10,000 rupees is going to be a steady income for Ramesh every month after he retires.

Note: We are only considering what pension Ramesh will get if he retires at his current designation and the amount that people of his grade are getting currently. The number might vary at his actual retirement time either due to governmental policy decisions on pension or his own designation. But the point here is that, keeping this number in mind for calculation purposes will be very useful.

3. Current Savings and Investments

The next thing to consider is your current Savings and Investments. If you have a decent investment portfolio, it may be sufficient to cover your retirement needs all by itself. For more details on Investment Portfolio Click Here.

If you have yet to begin saving for your retirement or are coming into the retirement planning game only now, you will need to compensate for your lack of current savings with greater contributions in the current timeframe.

Again, going back to Mr. Ramesh as our example, let us say he has a savings/investment portfolio of Rs. 2 lakhs now at his current age of 40. Assuming a reasonable real rate of return of 6% per year until he is 65, he will have roughly 8.5 lakhs of money by the time he retires at 65 years.

Depending on other sources of income he may have, this could be enough to fund his retirement so that Ramesh does not have to contribute large amounts of his ongoing employment income.

4. Other Sources of Funds

You may have other sources that will be available to fund your retirement needs. Perhaps you will receive an inheritance from your parents before you reach retirement age or have assets, such as real estate, that you plan to sell before or after retiring.

Whatever additional sources of funds you do happen to have, be sure to include them in your retirement projections only if they are certain to be available.
You may be expecting to realize a large inheritance from your parents, but they may have other plans like leaving a larger share to your brother or donating them to charity.

Another point to note is that, you may also get some extra funds like bonuses or lottery winnings, gifts etc. Though they are not certain to happen, you need to remember to consider them for your retirement fund if they do happen.

If you do happen to get a bonus it would be a good idea to park at least 75% of the sum for your retirement corpus and avoid the impulse to spend it all out.

Next - Adding Up Your Income Sources

After you have clearly defined all the available income sources with which to fund your retirement, make a list and add them up.

Let's continue with Ramesh’s sample retirement plan. Remember, all figures are in today's dollars.

Ramesh’s retirement income sources are:

1 lakh maximum annual retirement contributions from his 5 lakh after-tax earnings.

Ramesh will get a monthly pension of Rs. 10000 post retirement from his company.

Ramesh has Rs. 2 lakhs of current savings and investments. At a reasonable 6% real rate of return for 25 years, his savings should grow to 8.5 lakhs.

Ramesh does not have any other sources of funds he can conservatively expect to add to his retirement funds. He might win the lottery, but he's not counting on it.

As mentioned in the previous chapter, Ramesh will need 40 lakhs in today’s money to fully and properly fund his retirement goals.

Since, his current investments will only provide 8.5 lakhs from his 40 lakhs of retirement corpus expected, he will need to accumulate the remaining money.

This means, he will need to save up an additional 31.5 lakhs (in today’s money) by the time he is 65 years old (which is 25 years).

To calculate this, let's track his progress over the 25-year period:

Assuming a 6% annual growth rate and constant monthly/yearly contributions, we can find that Ramesh will need to contribute Rs. 42,500/- every year to save the required corpus of 31.5 lakhs.

This works out to roughly Rs. 3500 per month for his retirement corpus.

However, let us say his parents leave him their land in their home town that is worth Rs. 10 lakhs today as Ramesh’s share of the family property, that will bring down his amount required for the corpus by an equivalent amount. If that happens, his monthly contribution towards his retirement savings will come down to Rs. 2500 per month.

Alternately, Ramesh may wish to re-think his retirement amount and bring it down to 30 lakhs which again will bring down his monthly contribution to his retirement corpus.

Nonetheless, it is the individual’s decision to decide his/her retirement amount.

The most important point while doing these calculations is to remain conservative in your financial estimates (i.e., don't assume 20% annual investment returns or hitting the lottery) and settle on a plan that is realistic, sufficient and most importantly feasible.

Retirement Planning Series - How much money will I need?

In the previous article in our Retirement Planning series, we learnt how important it is to plan for retirement and have a sizeable retirement corpus.

The next big question anyone would have is "How much money do I need to retire?"

The answer to this question contains both good news and bad news.

As always, lets look at the bad news:

There really is no single number that would guarantee everyone an adequate retirement. It depends on many factors, including your desired standard of living, your expenses (including any medical costs) and your target retirement age.

That being said, lets get to the good news part.

It's entirely possible to determine a reasonable number for your own retirement needs.

All it involves is answering a few questions and doing some calculations. As long as you plan ahead and estimate conservatively, it's entirely possible for you to accumulate a nest egg sufficient to last you through your retirement years.

There are several key tasks you need to complete before you can determine how much money you'll need in order to fund your retirement. That includes:

1. Decide the age at which you want to retire.

2. Decide the annual income you'll need for your retirement years. It may be wise to estimate on the high end for this number. Generally speaking, it's reasonable to assume you'll need about 80% of your current annual salary in order to maintain your standard of living. (We are talking about value in todays money value without considering Inflation)

3. Add up the current market value of all your savings and investments.

4. Determine a realistic annualized real rate of return (net of inflation) on your investments. A realistic rate of return would be 6-10%.

5. If you have a company pension plan, obtain an estimate of its value from your plan provider.

A Sample Calculation

Let us consider the hypothetical case of Mr. Ramesh a 40 year old man earning Rs. 6 lakhs per year after taxes. Let us take a look at his key factors:
1. He wants to retire at 65 years
2. He will need around 5 lacs or more of annual income post retirement
3. He currently has Rs. 10 lacs in investment & savings
4. He will receive company pension of Rs. 20,000 per month (Assuming he retires at one grade higher than his current grade, which we will assume he will do so in the next 25 years)

Now, we determined that Ramesh needs around 5 lacs per year which comes to roughly 40,000 rupees per month. If we subtract his company pension, he will need to fund Rs. 20,000 from his own pocket to retain his current standard of living.

Additional Consideration: Ramesh is in good health and has a family history of longevity. He also wants to make sure he can pass along a sizable portion of wealth to his children. As a result, Ramesh wants to establish a nest egg large enough to enable him to live off of its investment returns - and not eat into his principal amount - during his retirement years.

We will assume that Ramesh should be able to earn 6% annualized returns (after considering inflation), he will need a nest egg of at least 41 lacs or more (2.5 lacs / 0.06).

As you can see – Ramesh needs to accumulate around 40 lacs before he retires in order to be able to fund the Rs. 20,000 he will need every month after retiring.

Note: We haven’t considered any taxes he would have to pay on the income he will earn. We will come to it later.

The Big Problem – Inflation:

Now, remember that all these numbers are in today's rupees. Since we're talking about a time period spanning several decades in future, we'll need to consider the effects of inflation.

In India the current Inflation is running above the 10% mark but is has been around the 8% range over the past many years. So, for our calculation we are going to keep inflation at 8%.

In Ramesh’s case he needs 40 lacs as of todays money 25 years from now. So to include inflation, we will multiply that number by 1.08, 25 times.

Inflation Adjusted Value = 40 lacs * (1.08 ^ 25) = 273 lacs or 2.7 crores


As you can see, the nest egg of 2.7 crores is a much much higher number than the 40 lacs we saw just in the previous paragraph. . This is because of the effects of inflation, which causes purchasing power to erode over time and wage rates to increase each year. Twenty-five years from now, Ramesh won't be spending 5 lacs per year - he'll be spending 17 lacs per year

Trivia:
If we consider Inflation @ 6%, then the nest egg required will be only 1.71 crores. A 2% increase in inflation every year has increased the nest egg requirement by 1 crore.

To explain in other words, a 40 lac nest egg and a yearly budget of 5 lacs in todays rupees is the same as 2.7 crore nest egg and a yearly budget of 17 lacs 25 years from now, assuming that inflation will run amock at 8% per year for 25 years.

The key is that we assume that savings will grow at a real rate of return of 6% annually. The numbers would actually be growing at 14% annually, but inflation would be running at 8%, so the growth in purchasing power would actually be 6% per year.

You don't need to worry about this too much for your retirement plan, but just keep inflation in mind when you determine how much you want to save for your nest egg every month.

Trivia:
Saving 2000 rupees every month now might look like a breeze now, but 25 years from now, your grandson will probably have more pocket money per week than 2000 rupees.

As you continue with your retirement plan year after year, simply check the inflation number each year and revise your contributions accordingly. Provided you do this, you should be able to grow your capital at your estimated real rate of return and reach your target nest egg.

Other Factors:

There are other factors that might affect your retirement plan for example:

1. You may choose to work part-time and make a smaller amount of money (when compared to what you are earning now) and that could help you maintain a better standard of living
2. You may purchase a residential or commercial property and rent it out to generate a steady source of income every month
3. You may decide to retire a few years early. In that case you may have to increase your monthly contribution to your nest egg (while you are working) to accumulate the same amount you wanted to do so as per the original plan
4. Best of all – The Government may come up with a scheme similar to Social Security to help the millions of Indians as a whole…


Happy Retirement Folks!!!

Retirement Planning Series - Why Plan for Retirement?

Before we even begin discussing how to plan for a successful retirement, we need to understand why we need to plan our retirement in the first place. This may seem like a trivial question, but you might be surprised to learn that the key components of retirement planning run contrary to popular belief about the best way to save for the future.

The following are some key reasons as to why you need to plan for Retirement.

Note: All the details below are with respect to India unless stated otherwise.

Lack of Schemes Social Security

This is probably the most important reason. India is one of the fastest growing/developing nations but we still do not have a strong scheme that can be compared to the Social Security System in the United States.

Trivia:
If we had such a scheme, do you think thousands of old aged people languish in old-age homes and in orphanages without proper food or shelter or medical facilities?

Unfortunately, we can’t blame our government because they do not have the money or the means to provide retirement income to everyone. If you ask me why cant they, then ask the same question to people around you when you see them not paying taxes. In the United States, Social Security is available to everyone who paid their taxes promptly and paid their Social Security contribution on a timely basis. Do people around us do so? When people don't pay the government what is due (in terms of taxes) we can’t expect the government to pay us back when we are old. Isn’t it?

Coming back to topic, at the end of the day, we are forced to save up money for our own future and unless we save money for our retirement, we are going to find it extremely difficult to survive post our official retirement.

Unforeseen Medical Expenses

As we get older, our medical requirements become more significant. A man in his 60’s will have far more medical expenditure than someone in his 20’s or even 30’s. so, when we cross that age of 60 and need money for our medical expenses, where will we go? We would need a retirement corpus that we can dig into at such times.

Trivia:
If you are someone who says, India is a land of culture where parents are treated with utmost respect and our children will take care of us, go back to the previous paragraph and read the trivia. Do you think we will have thousands of old aged people suffering in orphanages and old-age homes if this was the case? They are suffering without proper medical care because they don't have the resources for it. We shouldn't be in such a state. Or do you want to be in such a state?

Old age typically brings medical problems and increased healthcare expenses. Without your own nest egg, living out your golden years in comfort while also covering your medical expenses may turn out to be a burden too large to bear - especially if your health (or that of your loved ones) starts to deteriorate.

However, to prevent any unforeseen illness from wiping out your retirement savings, you may want to consider obtaining medical insurance, to finance any health care needs that may arise.

Financial Security of our Children & Grand Children

Moving on to a more positive angle, let's consider your family and loved ones for a moment. Part of your retirement savings may help contribute to your children or grandchildren's lives, be it through financing their education, passing on a portion of your nest egg or simply keeping sentimental assets, such as land or real estate, within the family.

Without a well-planned retirement nest egg, you may be forced to liquidate your assets in order to cover your expenses during your retirement years. This could prevent you from leaving a financial legacy for your loved ones, or worse, cause you to become a financial burden on your family in your old age.

Wouldn't you want to fund your grandsons dream to study his Masters degree in the United States? How proud would you feel if you can do it?

Flexibility & Peace of Mind

As we know, life tends to throw unexpected bouncers every now and then. Unforeseen illnesses, the financial needs of your dependents are but a few of the factors at play.

Regardless of the challenges you may face post retirement, a sizeable retirement corpus could be just what the doctor ordered for a peaceful life post retirement!!!

Sneak Peak: The Next article in the Retirement Planning Series is going to be about how much money would you actually need to retire...

Happy Retirement Planning!!!