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Retirement Planning: How to retire healthy, wealthy & wise

It sounds a little odd. Thirty-year-old person is yet to get a receding hairline, but is already talking of retiring. Just five years ago, he did his post graduation from a reputed B-school in India, and is already a vice-president in a large entertainment company.

He has had a successful career till date, earning a seven-digit salary. Now, he is planning to throttle his career life even more for he doesn’t see himself working after the age of 50. For that’s the time he is planning to pursue his life-time passion of wildlife photography.

This person is not the only one who aspires to retire early. But could that be a reality for this person and many other people? While the idea of a retired life could be a permanent good bye to all the work-related stress, the fear is of outliving your savings. Financial planners, therefore, advices a proper retirement plan to target a kitty that could earn enough income to sustain one’s lifestyle.

Take the case of this person who is planning to retire at the age of 50. And the life expectancy say is 70 years. Which means he needs income for 20 more years after retiring. Our analysis shows that anywhere from Rs 1-4 crore is needed to be build as a retirement kitty to earn an income of Rs 5-10 lakhs post-retirement for individuals aged between 25 and 40. And these income levels have been adjusted for inflation. And to earn that kitty, monthly investments of Rs 6,000 upwards is needed.

So, for a 25-year-old, who has 25 years more to invest and build a kitty of Rs 1.9 crore to sustain income for 20 years, monthly investments required would be Rs 6,613 for 25 years. This is to target a kitty of an annual income of Rs 5 lakhs. For this person, to earn Rs 10 lakhs annually, he would need to invest Rs 21,526 on a monthly basis for 20 years. The expected investment return on portfolio has been assumed to be different (in the range of 8-15% pa) due to a varied investment horizon. As a thumb rule, as the age increases, expected investment return has been reduced.

Early beginner advantage

When you turn 25, you have least financial responsibilities. The chances are that you are staying with your parents. That saves you from paying rent. Also, it is likely that either or both your parents are still working. So they are not dependent on your income. That leaves you with huge surplus income to invest.

Once you near the age of 30, you may think of buying a house. That brings the EMI component to your monthly outgo. Then, as your responsibility increases — like a family, car, children’s education and their upbringing, there is limited scope for you to save, say financial planners.

An investor shows a higher risk appetite when he is young and kicking. The fact that an investor doesn’t have too much of financial responsibilities on his/her shoulder, influences him to look at riskier investments. The fear of losing the capital is often muted by the possible higher gains he/she may make in future. But this risk-prone behavior subsides with increasing age and responsibilities.

Facts and figures you must know

The decision to retire early has to be viewed from two sides. One is the willingness to retire and another is the ability to retire. When you start saving early, you see large chunks of money, hence, savings — which make you believe that you can afford to retire early. But when you pass through the age band of 24 to 45 years, you can’t foresee many contingencies.

If you have contingencies coming your way, it necessitates building some buffers into your financial plan to retire at 45. Today, life expectancy has gone up because of medical advancements. Medical costs too have gone up. Inflation is on the rise. So if you plan to retire at 45, you have to build a huge corpus to retire rich.

Now, this corpus depends on what you want to do after the retirement. It should be Rs 2-4 crore or upwards to have a basic living, especially if you decide to stay in a metro city. How inflation impacts your finances

To put it simply, say you want to earn an annual income of Rs 5,00,000 after 25 years. In that case, you should actually be earning an income of Rs 17,00,000 after 25 years. This is after adjusted for inflation of 5% annual inflation. One of the main reason why a youngster should target a larger kitty than otherwise.

Live more for future than present

If you plan an early retirement, then you are left with no option but to live for the future than live in the present. You need to make significant trade-offs in existing lifestyle to ensure a good retired plan. At the current life expectancy level, if you plan to retire at 45, your working life may work out to 20 years and life after retirement is likely to span over 30 years.

Another aspect you cannot ignore is that most important milestones in your life, including children’s education and their marriage will hit you when you are at mid 50. That implies you have to save even more as the Rs 2 crore to Rs 4-crore corpus is just enough to meet your monthly expenses. But the most important component of your investment portfolio is the healthcare-cover. This is especially relevant for today’s generation who want to retire early on account of mounting healthcare costs.

Life expectancy has also gone up significantly, which means that you may frequent the hospitals/medical centers in case of any health complaints. You can save on this cost with a comprehensive health cover.

In this story, one should note that the monthly investment requirement is just an indicative figure and, in fact, it comes down to the extent one has already invested. The idea is to target a kitty post retirement and work diligently towards getting it.

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