Retirement Planning – How to retire in style?

[melvin@finvin.in]

When to plan for your retirement?
This is a million dollar question. Many are under the impression that the retirement plan can wait and it is better done after 45 years. No, retirement planning should be your early priority because it will help you to reach the goal with minimum investment. I will explain it with an example.
If you are investing 5000 per month from age 25, you can accumulate around 2.7 Crore when you are aged 60. But if you start investing 10,000 per month from age 35, you will have only 1.7 Crore at age 60. If you start with even 25,000 at age 45, you will only have 1.1 Crore at age 60. Starting early makes huge difference.
How much is required for retired life?
This purely depends on the type of retired life you want to live. If you can sacrifice the luxuries and lead a simple life, the required amount will be small. But having enjoyed the life so far, nobody wants to compromise on them even after retirement.
The first step in retirement planning is to decide on an amount you want to provide every month after retirement. Suppose you are aged 30 now and want to provide an amount of 50,000 per month in today’s cost on your retirement at age 60. The calculation will be as follows.
Value of 50,000 after 30 years at 7% inflation = 3.8 Lakhs. So, you require 3.8 Lakhs in the first month after retirement to maintain a standard of living which is equivalent to today’s 50,000. The monthly requirement of 3.8 Lakhs will again increase due to inflation.
To provide an inflation adjusted withdrawal of 3.8 lakhs per month for the next 20 years (assuming a longevity of 80), the amount required is 8.3 Crores. I have assumed a return of 8% and an inflation f 7% for this calculation.
The amount of 8.3 Crore looks huge now, but it is just sufficient for this monthly expenses till you are aged 80.
How to accumulate the amount for retirement?
You can look at a combination of equity and debt to create this amount of 8.3 Crore at age 60. You can also look at PPF for the debt part.
Public Provident Fund (PPF)
You can also open a Public Provident Fund (PPF) which is a flexible investment option of the government. In this scheme you have the flexibility to invest any amount in the range of 500 – 1.5 Lakhs in a year. The scheme is for 15 years. There is an option to extend the term in blocks of 5 years after the 15 years. Thus you can continue to invest in it for the next 30 years by extending it 3 times after the initial 15 year period. As of now the return on this investment is 8.7% but it can vary depending on the interest rate situation in the country. For long term like 30 years, you can expect around 7% return on it. The attraction is that the entire amount received on maturity including the interest is tax free. You can withdraw the amount in lump sum or can opt for yearly withdrawals. If you invest 1.5 lakh for the next 30 years, you will have around 1.4 Crore at age 60 assuming a return of 7%.
Mutual Fund SIPs – Systematic Investment Plan
You are now aged 30 and have another 30 years to accumulate this amount. At this age you can afford to take a higher exposure to equity. The best and simple way to invest in equity is through mutual funds. In mutual funds, professional fund managers invest your money in good quality companies and charge an annual fee for their services. This is an ideal way for long term wealth creation. Good mutual funds have given returns in the range of 20% in the past 20 years. But don’t expect such high return to continue for the next 30 years. I am assuming 12% return from equity for this calculation. You may have to invest 23,000 per month for the next 30 years to create 6.9 Crore at age 60.
The other option is an increasing SIP.
In this case, you need not invest 23,000 per month now. You may start SIP of 13,000 now and increase it by 7% every year for the next 30 years. This will be easy for youngsters whose income will increase gradually. Increasing the SIP by 7% will not be an issue for them. This will also create around 6.9 Crore at age 60.
Asset allocation
Asset allocation and rebalancing is very important in retirement planning. At young age, you can have higher allocation to equity. After age 45, you may start reducing your allocation to equity and increase towards debt. This can be done by systematic transfer plan by which a portion of the amount in equity can be transferred to debt funds in a systematic way. This will ensure that your savings will not be affected by any last minute volatility in equity market. At the time of retirement, you can have around 20-25% allocation to equity.
From PPF and SIPs, you can accumulate 8.3 Crore for your retired life at age 60. You can live in style for the next 20 years utilizing this amount.

Melvin Joseph
SEBI registered Investment Adviser
SEBI registration number -INA 000000342
Finvin Financial Planners ,10 Ground Floor, Olive Excel CHS Ltd
Plot No- 16, Sector 42, Nerul, Navi Mumbai – 400 706
Mobile: 91 9820843739
Website : http://www.finvin.in

        

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