Rs.1 cr for retirement? Won’t last for 30 years

Typically, the thought of retirement crosses one’s mind when one enters the 40s. The most important question is how much would one need after retirement. It is very difficult to have an idea of how much money you would need after 30 years. Random figures of Rs 50 lakh and Rs 1 crore is often bandied about, but are they enough?

Based on an inflation rate of 5% per year, in 20 years time, the estimated value of your Rs 1 crore money in today’s terms might be Rs 38 lakh only.

DNA Money spoke to personal finance experts and wealth managers to know the right approach.

“The question of ideal ‘retirement corpus’ is baffling and any underestimation of the same during the accumulation stage can lead to horrific results. Before calculating the ‘nest egg’ (retirement corpus) one should analyse present earnings and realistically project where one wishes to be in future,” says Abhijit Bhave, CEO, Karvy PrivateWealth.

A simple thumb rule to calculate the “retirement corpus” is to compound present annual expenses by an inflation rate of approximately 5% for the number of years left for retirement and then multiplying this for the number of years one expects to live after retirement. For example, assuming the present age is 30 years and the retirement age is 60, one would compound for 30 years (that is, remaining years till retirement). “And then this needs to be multiplied for at least 20 years (assuming a life expectancy of 80),” says Bhave.

The first step to build a sufficient retirement corpus is to separate retirement planning goals from all other short/medium-term goals like buying a car, children’s’ education, family vacations, etc.The segregation of retirement goal from every other-other goal ensures undivided attention on building the retirement corpus. In short “do not dip into retirement savings before you retire”.

Start investments early in life, that is, as soon as one starts earning, and simultaneously lay the roadmap for retirement planning. Involving family, that is, sitting with spouse and children during the retirement planning stage is important as any financial decisions are undertaken will have a far-reaching impact on the entire family.

“All younger couples are recommended to have a high exposure to equity during the accumulation phase while gradually moving towards higher debt allocation as the time of retirement approaches. During the accumulation stage suggested asset allocation towards equity/debt could be 50-75% equity and 25-50% debt, after considering individual risk profiles,” says Bhave.

Methodical approach

The retirement corpus is best an estimate and its calculation should factor in all possible expenses one will incur post-retirement. In that sense the retirement corpus should be revised or updated regularly to make it as realistic as possible, says Rahul Jain, head, Personal Wealth Advisory, Edelweiss.

Since the basis of retirement corpus is expenses, the calculation of retirement corpus should start with current expenses.

Jain uses an example to help investors understand. Sanjay is 40 years of age and plans to retire at 60. His life expectancy is assumed to be 90 years. His current expenses (household, lifestyle, insurance premium, etc) is Rs 50,000 per month. This is the expense between Sanjay and his spouse. “Let us calculate his retirement corpus: current annual expenses: Rs 6 lakh, assumed inflation: 7% per annum, estimated expense at retirement (after 20 years): Rs 23 lakh. Rate of return he expects to earn post-retirement: 6% per annum (assumed post-tax). So, the present value of post-retirement expenses (60-90 years): Rs 8 crore.

There are some common pitfalls of retirement corpus calculation. Firstly, the rate of inflation needs to be close to the actuals, Jain thinks the number should be closer to our long-term average CPI of around 8% per anum.

Second is the rate of return post-retirement. “Assuming one would park his entire retirement corpus into bank Fixed Deposits to fetch regular income, this rate can be around 7-8% pre-tax. Post-tax one it works out to 5-6% per annum,” Jain explains.

Thirdly, one should not forget to factor in and revise the medical expenses post-retirement. One should definitely budget in the medical insurance premium.

Fourth, life expectancy should be taken on the higher side. “Very often people take a smaller age. This makes the retirement corpus required small, hence, this approach should be avoided. Plan for higher life expectancy,’ advises Jain.

Taxation aspect

Annuity, FD, Senior Citizens Savings Scheme, etc, are all taxable as income.

“One needs to look at whether the product in question is subjected to tax or not. If it is subject to tax, we need to see whether it would be subjected to capital gains or income tax. Normally capital gains tax treatment is more favourable,” says Suresh Sadagopan, Founder, Ladder7 Financial Advisories. An efficient vehicle for a person in the upper tax brackets would be tax-free bonds, PPF, FMPs.

Source: DNA Money