RETIREMENT PLANNING-IDEA / CONCEPT 1

Every week, if not every day, a similar question comes into my feed. Words may be different but the tone is almost always: I am ___ years old. I wish to retire at ____. How much money do I require to live independently? Unfortunately, every case is different. There are many parameters and hence there is no one single answer. The factors that affect are: What are your current expenses not including any debt/loan repayments? Are there any loans that are being serviced? (Here you said that the home is loan-free but what about other loans? A car loan is very common at the age of 45.) How many children do you have? What are their ages? (The cost of raising a single child can be high. As per Robert Kiyosaki, a family is “a liability”.) Do you support your elder parents/parents-in-law in any way? What kind of lifestyle do you follow? If you look at the chart below, I have tried to capture all kinds of expenses - daily, monthly and annual. Expenses You must look at your daily, monthly and annual spends. An easy way to do that is: Get the last 12 months of bank statements for all bank accounts held in Excel Format Zero out or reduce one-time spending that won’t occur in future. Purchased an AC recently? Remove this amount as you won’t be buying a new one for another 10 years (hopefully). Take the sum of these adjusted debits and sum all debits across all banks Divide the figure by 12. (Most people will be pretty surprised by the result as most do not consider annual spends into monthly fashion). Some assumptions You have to assume some figures: You are retiring and that is fine? But will you/do you have sources of passive income such as rent from other property, stock dividends, income from Web or Youtube, etc. Let us assume this to be zero. How long do you expect to live? 85 years is usually a good average. But remember that you or your spouse will outlive the one who dies earlier (usually women outlive men). So you must calculate the number of years during which the corpus must last. As you say, you are a man aged 45 years, your wife is 41. So you require the corpus to last 49 years at least. What will the inflation rate be like in the future? Currently, it is 6.5%. Assume a constant 6% for all years in future. How much return do you expect by investing the principal corpus: Bank deposits yield 5–6%. Various other long-term debts yield around 7% on average. A hybrid of debt + equity can yield 9–10%. Pure equity mutual funds can yield 12–13%. A mix of debt + equity MF + stocks can yield 17–20%. In a retired state, it is best not to hedge on risk. At the same time, one must be able to beat inflation and tax. So the third option (Hybrid of debt + equity) is the best. Finally, the tax. Here you can assume that tax rates will remain steady with partial reduction every 3–4 years as announced by the government. It is always prudent to expect the worst and hope for the best. This means that one should assume maximum logical values of the above and hope that you get the best from time to time. For example, I predict that a retired couple, 60/656, having no debts, no dependents, and a lifestyle neither too frugal nor expansive/expensive, will require ₹50,000~55,000 per month today. If that is the case, then a corpus of ₹ 1.25 Cr is required. This is for basic living only.