RETIREMENT planning is one of the most important decisions to be taken in one's life, but most people usually ignore it. It is one of the earliest decisions to be taken, yet it is thought of at last. This is something that needs to be planned professionally, but most people adopt a carefree approach.
Rate of inflation is one key element in retirement planning. Many of us do not really track what kind of an inflationary scenario we are going through. We also forget to take note of the fact that the rate of inflation in an individual's case can be higher or lower than the government-announced inflation rate due to rising standards of lifestyle.
Inflation plays a key role when you try to work out the amount you will require at the time of retirement. It should be sufficient to take care of your necessities throughout your post-retirement phase.
Post-tax return on your savings is an important factor and you need to figure out if it is mo re than the rate of inflation.
Various parameters that one needs to consider for retirement planning will be current expenses, pre-retirement inflation, post-retirement inflation, returns on savings net of tax pre-retirement and returns on savings net of tax after retirement, current savings, current age, retirement age and life expectancy.
What more, you will have to treat retirement planning separately from your savings for children's education, marriage, housing, car, travel and medical expenses. In fact, each and every requirement needs to be treated separately.
Factors specific to each individual head could be current income, past savings, inherited wealth, stability of income, current expenses, number of family members, health of family members and, especially, of the earning member, immediate and future family responsibilities.
Let us take the examples of two persons aged 25 and 35 with various monthly expenses of Rs 15,000, Rs 20,000 and Rs 25,000 and try and find out the corpus they will require at the time of retirement for various life expectancies such as 70, 75, 80 and 85 years and what will be the monthly savings required till retirement at various rates of return.
For convenience, we would assume pre-retir em ent inflation at 7 per ce nt; post-retirement inflation at 5 per cent; pre-retirement returns net of tax at 8 per cent, 10 per cent, 12 per cent and 15 per cent; postretirement returns net of tax at 5 per cent, current savings to be nil and retirement age at 65. We would also assume the balance at the end of life expectancy to be nil.
Observe the variation in savings required with the same monthly expenditure but different life expectancy and also with different rates of returns within the same life expectancy. Also observe the variations with different monthly expenses within the same life expectancy.
For example, the 25 year old with expenses of Rs 15,000 a month will require about Rs 1.5 crore if his life expectancy is 70 years and about Rs 5.25 crore if his life expectancy is 85 years.
If the monthly expenditure rises to Rs 25,000, the same person will require about Rs 2.25 crore and Rs 8.75 crore for life expectancy of 70 years and 85 years, respectively.
Also assume the case of a 35 year old who has a life expectancy of 85 years, monthly expenditure of Rs 25,000 and pre-retirement net of tax returns of 10 per cent. What if he is able to generate only 8 per cent return instead of 10 per cent? In such a case, he would accumulate only Rs 3.05 crore instead of the Rs 4.50 crore required.
If you are able to control expenditure and reduce pre-retirement inflation with one percentage to 6 per cent, the requirement will fall to Rs 3.40 crore from Rs 4.50 crore for a life expectancy of 85 years.
If you increase the retirement age by one year to 66 years and net rate of return pre-retirement is raised by 1 per cent, you need to save only Rs 17,500 a month instead of Rs 31,500 for life expectancy of 85 years.
If you increase net postretirement returns by 1 per cent to 6 per cent, you need to save only Rs 16,000 a month or 49 per cent less for a life expectancy of 85 years.
Another point to be considered is what should be the ideal life expectancy.
There could be various considerations depending on where you live, your family's average life expectancy, health, climatic conditions, job tensions and habits.
Various parameters that one needs to consider for retirement planning will be current expenses, pre-retirement inflation, post-retirement inflation, returns on savings net of tax pre-retirement and returns on savings net of tax after retirement, current savings, current age, retirement age and life expectancy.
What more, you will have to treat retirement planning separately from your savings for children's education, marriage, housing, car, travel and medical savings to be nil and retirement age at 65. We would also assume the balance at the end of life expectancy to be nil.
Observe the variation in savings required with the same monthly expenditure but different life expectancy and also with different rates of returns within the same life expectancy. Also observe the variations with different monthly expenses within the same life expectancy.
For example, the 25 year old with expenses of Rs 15,000 a month will require about Rs 1.5 crore if his life expectancy is 70 years and about Rs 5.25 crore if his life expectancy
