Know your Real Retirement Costs & Live on your terms
Retirement may not be about just meeting the necessities. It could be about getting to do things you have always wanted to, given that you have a lot of time in hand. You may want to go on along holiday, pursue a hobby/sport or just pamper your family with gifts. The idea is to a live a comfortable life after 60 because at this age you neither have to report to work at 9 am or pay 50-60% of your salary towards housing and car loan. You feel you have fulfilled all your responsibilities as a child, spouse and father. Hence this is your time to get more out of your life. Retirement Planning is all about knowing your real retirement costs, building a kitty by investing prudently and having a systematic withdrawal plan from your kitty post retirement.
Tackling Multiple Inflations
Inflation, as a macro economic indicator, gives you an indication of the actual value of your money. Apart from giving an idea about your future value of expenses, inflation has a far-reaching impact on your money. You have to factor in inflation while planning for a long-term goal such as your retirement as its impact is much higher over a period of 15-20 years. If your monthly expense is Rs 30,000 today, you will require Rs 1.16 lakhs at your retirement after 20 years just to foot your monthly expenditure assuming the inflation grows at 7% per annum. This money will just suffice to maintain your current lifestyle. Any other add-ons means a higher saving. Moreover, due to inflation the expenses will go up further with your age.
- Medical inflation: Healthcare expenses are soaring at 10-20% year-on-year. Typically expenses towards your healthcare needs tend to rise as you age. Hence you should consider it, while building your retirement kitty.
- Lifestyle Inflation: Over developed some tastes and desire, which come at a cost. Eating at fine dine restaurants, playing golf, a foreign holiday, watching movies at multiplexes are some examples. This is what you spend on maintaining a lifestyle that you desire; hence it is termed lifestyle inflation.
Building the retirement kitty
The biggest challenge in retirement planning is to build a basket of investments that fights inflation, volatility and uncertainty. This is crucial as retirement planning is a long-term exercise ranging anywhere between 15 to 30 years.
Ideally, an individual should start early to benefit from compounding effect. For example, if you save Rs 2000 per month for a period of 30 years, you will accumulate a corpus of over Rs 41 lakhs at 10% yield. If the saving tenure reduced to 20 years, the size of the corpus will be Rs 14.48 lakhs and will further shrink to Rs 8.0 lakhs if the tenure is 15 years. In case of compounding effect, the value multiplies because of the reinvestment of assets.
Investment options:
- Equity: Equity related instruments such as Stocks and Mutual Funds have the potential to beat inflation in long term. If you don’t have sufficient surplus cash, you can consider doing a SIP in stocks or mutual funds. Returns from equity shares or equity oriented mutual funds are also tax free if you hold your investment for minimum one year. You can also consider investing in Equity Linked Saving Schemes. ELSS is simply a tax saving scheme which offers you benefit of tax saving along with growth potential.
- National Pension System: National Pension System (NPS) – a contribution scheme, which helps you building a retirement corpus in a systematic manner during your working life. On retirement, you can withdraw up to 60% of the corpus as lump sum amount. The balance 40% will be transferred into annuity account, which comes back to you as a monthly pension. You even have the option of taking the entire corpus as a monthly pension. Contribution in NPS is eligible for claiming deduction under section 80CCD of Income Tax act.
- Employees’ Provident Fund: The rate of return from EPF is fixed at 8.8% p.a. for financial year 2016-17. Unlike NPS, EPF does not have any restrictions such as purchasing annuity. However, it is advisable to stay invested in this scheme by opting for EPF transfer whenever there is change of job. This would ensure that you reap the benefits of guaranteed returns along with power of compounding. Employee’s contribution towards EPF is eligible for claiming deduction u/s 80C of income tax act.
- Public Provident Fund: PPF is a 15 year account which can be extended in the blocks of 5 years. Current rate of PPF is fixed at 8.10% per annum which will be reviewed on quarterly bases. Only resident Indian can open a PPF account and one individual cannot have more than one account. Minimum contribution the subscriber has to make in PPF is Rs. 500 and maximum is Rs. 1.50 lakh in one financial year. Contribution in PPF is eligible for deduction u/s 80C and also interest earned on investment is exempt from income tax.
Reaping Rewards
A systematic withdrawal plan from your retirement kitty is as integral as your savings strategy. Given the increase in longevity of life because of medical advancements, an individual is expected to live an average of 20-25 years of retired life hence retirement kitty has to be frugally utilised over a period of time.
You work hard to save enough money for a comfortable retired life. But you cannot ignore the important costs and inflation, which can actually sabotage your entire retirement planning exercise. Hence calculate all your expenses today, add at least 7% annual inflation figure to those expenses. This will truly ensure you have a financially independent life after 60.
