How sensitised are you about retirement planning?

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Have you ever considered how much corpus you will need for a comfortable retirement? This is a question that often catches people off guard. My recent interactions have consistently shown the surprising lack of awareness among well-educated individuals regarding the necessary retirement corpus. Thanks to modern medicines and medical interventions, lifespans are continuously increasing.

As a result, there is a genuine chance of running out of money if one does not plan retirement cash flows well. Using some real life example, let us see why it is critical for each and every one to plan for a substantial retirement fund.

The disconnect

In my first conversation with a finance professional holding a Company Secretary’s Degree, I was taken aback when she confidently stated that her Rs. 70-80 lakhs of investments would suffice for retirement. Similarly, a well-traveled individual with a successful career in the US showed surprising naivety about the amount required for a comfortable retirement in India. These encounters highlighted a common trend: educated individuals often underestimate the need for a robust retirement corpus, revealing a widespread lack of understanding about personal finance requirements.

Realistic example

Let us bring the point home with two examples. Mr. Sham, a 40-year-old professional, aims to retire in 15 years, requiring a monthly income of Rs. 1.5 lakhs to sustain his desired lifestyle. Considering a 7% inflation rate and post-retirement investment returns at 8.60%, Mr. Sham needs a corpus of Rs. 11.40 crores. On the other hand, Mrs. Ragini, aged 30, plans to retire at 55, seeking Rs. 1 lakh per month for a comfortable life. Her required corpus? A substantial Rs. 15 crores.

The time factor

The key takeaway is clear: to provide for 20-25 years of retirement, you must accumulate a considerable corpus during your working years. Yet, how many of us are aware of this reality, and more importantly, how many are willing to start planning as early as possible? During the earlier times, pensions and the presence of a joint family were great buffers due to which one never had to calculate for retirement days. In today’s time, inflation across the spectrum whether it is in food prices, medical care or medicines, the cost attached to services is steadily marching higher at a faster pace than ever before.

Retirement planning essentials

When embarking on retirement planning, one has to consider various facets, including asset mix, cash flow planning, and contributions to retirement schemes like employee provident funds, public provident funds, and national pension schemes. While the numbers may seem daunting, remember that starting early is the key to building a substantial retirement corpus. While we may think that several factors like entertainment costs and cost of daily commute to work will be saved, remember that with age medical costs increase. A single hospitalization can wipe out a significant portion of one’s savings if there is no adequate health cover.

The power of compounding

The reassuring fact is accumulating Rs.10 Crore is not difficult. If you start saving early and consistently invest Rs. 35,000 monthly for 30 years at a compounding rate of 11%, you can accumulate a comfortable Rs. 10 crores. This underlines the importance of early action in securing your financial future.

Given that the goal is long term in nature and may be decade or decades away, an investor can consider investing into equity schemes for this requirement. As one nears the goal say five to seven years away from retirement, it is important to transfer the corpus created to a debt or hybrid scheme basis’s one’s risk appetite. The aim of this move is to protect the corpus from equity market volatility as there is not much time left to recoup losses if the market enters a correction mode.

The important aspect to remember in this journey is to be consistent with one’s investment and not withdraw from retirement corpus to meet other unplanned expenses. While all of this may sound intimidating, the optimal approach is to seek the help of a financial advisor who basis your unique requirement will put together a retirement plan to meet your needs.

Author’s note: This article has been written by Kshitija, Director of Gaining Ground Investment Services Pvt Ltd.

Note: This is a partnered post.

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow