Most of us keep delaying planning for our requirement. Thinking that our retirement is quite far away, we put the retirement planning on the back burner. We keep our focus on the near term goals. We need to keep in mind that, given the nature of goal, adequate retirement corpus will probably be the biggest financial goal in terms of amount. As with other investment goals, the sooner you start, the less you need to save per month to reach that financial goal. In this post, we discuss the peculiar problems retirement planning throws at us. Additionally, we also provide an excel based retirement corpus calculator to help you get an idea of your retirement needs. Download the retirement corpus calculator here.
How is Retirement Planning different?
In your regular goals such as child education and marriage, car, house or a vacation abroad, you have a timeline and a cost estimate. You save/invest for that goal and when the event happens, you utilize the corpus to meet that goal. This is not to deny that, even with such goals, a number of assumptions need to be made, which does not make the task easier. However, retirement planning is much more complex. We will list some of the reasons that make retirement planning so complex.
- The biggest problem is how to decide longevity. If only you could tell how long you are going to live. The longer you live, the more funds you will need.
- Unlike regular goals, the funds do not get utilized at one go. You keep making regular withdrawals from the corpus. At the same time, the corpus keeps growing at an assumed rate of return. You need to make sure that you do not run of funds while you are alive.
- Retirement planning is about planning for everything else. You have already planned and provided for your important goals. Everything else (even gifts to your grand children) has to be borne out of your retirement corpus, especially after retirement. During retirement, the ability to generate additional income is limited. Hence, taking care of an unplanned expense can severely dent your retirement corpus.
- Your living expenses can be divided under different heads e.g. food, health care, rent, leisure etc. Inflation under individual heads may be much higher than general inflations. This increases the number of assumptions you have to make.
Take Conservative Estimates
It goes with saying that the outcome of retirement corpus calculator will depend on your assumptions. Therefore, it makes great sense to be conservative in your several of your assumptions while planning for retirement. By making optimistic assumptions about expected returns, you may bring down your savings requirement significantly. However, that may not be a wise decision. A conservative estimate, on the other hand, may put pressure on your monthly cash flows before retirement. But it will give you a good buffer to account for unexpected expenses during the retirement.
We recommend that you do some sensitivity analysis and find out the corpus requirement for different values of life expectancy, returns and inflation. You will be able to see what minor changes in some of these assumptions can do to your retirement corpus requirement. For one of the combinations we tried, increase in life expectancy from 80 to 85 years increased the corpus requirement by ~ Rs 9 crores. We decreased the post retirement return from 6% to 5%, the corpus requirement went up by Rs 5.0 crores.
About the Retirement Corpus Calculator
It is not easy for any model to capture real life situations. This model is no different. We have made a number of assumptions, which may be very different from real life situations. Additionally, the calculator requires you to make a number of assumptions such as life expectancy, specific inflation, return on funds etc. You are advised to enter conservative values to get a safer (although higher) estimate. You are advised to seek services of a fee-only financial planner or a registered investment adviser to get a more accurate assessment of your retirement needs. Depending upon your inputs (assumptions), this calculator will give you the amount required at the time of retirement and monthly investment amounts in debt or equity to reach that corpus. Please note there may be other better ways (asset classes) of reaching the required retirement corpus. However, we have considered only debt and equity investments.
Decumulation (fund utilization during retirement) is not covered under this calculator. Please note decumulation of retirement funds is as important (or even more important) as accumulation of retirement. Though the calculator shows how funds will be utilized every year given your assumptions, there are several other decumulation strategies including but not limited to purchase of annuities or pension, bucketing etc. Coverage of such strategies is beyond the scope of this post.
Download our free excel based retirement corpus calculator here.
Image Credit: Chris Potter, 2012. Original image and information about usage rights can be downloaded from Flickr and StockMonkeys.com
Deepesh is a SEBI registered investment adviser and Founder, PersonalFinancePlan.in. For any clarification/feedback/inputs on the retirement corpus calculator, please write to us at support[at]personalfinanceplan.in.
