How to plan Your Retirement

Goal Based Financial Planning – Building a Retirement FundSandeep is a 28 year old guy staying with wife Karuna and 1 year old son Praveen. Sandeep is a fitness freak; he goes for a jog everyday early morning in a garden near his house. One day after a jog, he was relaxing on a bench. An elderly person came and sat next to him. Sandeep smiled and initiated a conversation. During the conversation he asked the old man where he stayed. In a sad tone, the old man replied, “An old age house run by a NGO”. Sandeep was a little surprised and asked the old man how he landed up there. The old man said he spent most of his lifetime earnings on the upbringing of his son, his education, his marriage and to fulfil all his other needs.

The result: After retirement he was not left with anything for himself. His son was not ready to take care of him in his old age and so he had no choice but to move to the old age house. Sandeep was shocked to hear the old man’s sad tale. While Sandeep was walking towards his house, he was wondering what if his son Praveen also does the same thing with him in his old age. While Sandeep wants to give the best of everything to his son, he does not want to depend on his son during his retirement years. Do you also feel like Sandeep and don’t want to be dependent on your children during your retirement years? In this article we will explain to you step-by-step on how to go about building a retirement fund to sustain yourself in your golden years.

Step 1: Calculate what will be your expenses at the time of retirement
Let us continue with the example of Sandeep.
Sandeep’s current monthly expenses: Rs 15,000 a month (Rs 1,80,000 per annum)
Sandeep’s current age: 28 Years
Years remaining for retirement: 32 Years
Inflation rate assumed: 8% per annum (This is the expected increase in the annual cost of living)

Expenses in the 60^th Year: If Sandeep’s expenses or annual cost of living increases by 8% per annum (inflation) then in the 60^th year Sandeep’s annual expenses will be a whopping Rs. 19,56,180 (Rs 19.56 Lakhs).

Step 2: Growth in Expenses during the Retirement Years
During next 20 years of retirement even though Sandeep’s income will not be there, his expenses will continue. Infact his expenses will not even stay steady and continue rising at the inflation rate. Let us assume that during the retirement years; expenses are expected to grow at the rate of 6%.

Step 3: Calculate the amount you will need at the beginning of your retirement to sustain yourself during your retirement years.
We have seen above how Sandeep’s expenses will continue to grow during the retirement years. So Sandeep needs to be ready with a retirement fund or retirement corpus that will take care of his expenses and sustain him with the same standard of living during his retirement years.

The below table shows how Sandeep can use his retirement fund to sustain himself during his retirement years. The table shows how Sandeep can withdraw a lumpsum amount from the retirement fund at the beginning of the year for his annual expenses. The remaining fund amount is invested in a fixed income security that will earn an annual return of 8%.

During the retirement years (age 61 years to 80 years) the inflation assumed is 6% and the growth (return on investments is assumed at 8%)

The Corpus that will be required by Sandeep at the beginning of 1^st year of retirement will be Rs. 3,49,25,656.55 (Rs. 3.49 crores) to sustain the same standard of living (inflation 6%) for the next 20 years.

Step 4: Make a Plan: Roadmap for achieving the goal of building the Retirement Fund
Now that Sandeep knows the retirement corpus amount (Rs 3.49 crores) that he needs to be ready with when he retires; he needs to start planning on how to achieve that goal. With the help of a professional financial planner, Sandeep should draw up an investment plan that will help him realise his goal.

To accumulate the fund of Rs. 3.49 crores in the next 20 years assuming the investment earns 12% return, the annual investment required to be made by Sandeep will be Rs. 1,02,292.46 (monthly investment of Rs. 8,524.37). To learn about which mutual funds should Sandeep invest in, click here.

The below table explains how to go about achieving the goal

The above plan explains how Sandeep can accomplish his financial goal of building a retirement fund of Rs 3.49 Crores in 32 years. Sandeep can invest in diversified equity mutual funds for 32 years. As Sandeep’s age goes on increases, he should slowly and steadily go on reducing the equity component from his retirement fund and go on shifting the money to debt instruments. Two to three years before the goal date he can shift his entire money to safer fixed income avenues. An investor should not keep his money in risky investments like equities till the last year of investment.

Step 5: Implement the Plan
For long term goals like child education planning, child marriage planning, retirement planning etc. where the time horizon is beyond 5 years, investors can choose to invest in a mix of diversified equity mutual funds and balanced mutual funds. Historically in India equity markets have given returns of around 15% CAGR (Compounded Annual Growth Returns) over long periods. To learn about which mutual funds are good for long term investments, click here.

But we have taken a conservative approach and assumed a return of 12% instead of 15%. At the end of the term if Sandeep has more money than planned in his retirement fund, it is a bonus for him. But by assuming aggressive returns which are difficult to achieve, if Sandeep falls short of the required amount, it will lead to last minute problems for him.

Sandeep decides to invest in a mix of diversified equity mutual funds and balanced mutual funds assuming that his investments will give returns of about 12%. Let us see how Sandeep can go about building his retirement fund.

• Sandeep will have to invest Rs. 102292 annually (Rs. 8,500 monthly) for 32 years.
• Assuming that Sandeep’s investments give him a return of 12% in 32 years; the value of Sandeep’s fund will be Rs. 3.49 Crores.
• As Sandeep’s age goes on increasing, he should go on steadily reducing the equity component of his retirement kitty and replace it with higher debt component.
• During the last 3 years, Sandeep should stop the equity investments all together and invest only in debt instruments. Also he should gradually start shifting all the money from equities to debt. This shift from equity to debt is essential to protect the retirement fund in case there is a sudden sharp fall in the market due to any unexpected event.

Sandeep can use this amount to live his retirement life independently, that too without compromising on his standard of living.

The above table shows how the growth in Sandeep’s retirement fund / corpus will look like.

Step 6: Review the plan regularly
An investor should regularly review the performance of the mutual funds that he has invested in, to make sure that the selected funds are performing on expected lines taking him closer to his financial goal with every passing year. In this case, with the help of his financial planner, Sandeep also will have to review the performance of the mutual funds that he has invested in, to make sure that they are giving returns on expected lines.

Conclusion
Let us quickly summarise the steps to be followed for retirement planning:

• Step 1: Calculate what will be your expenses at the time of retirement
• Step 2: Growth in Expenses during the Retirement Years
• Step 3: Calculate the amount you will need at the beginning of your retirement to sustain yourself during your retirement years.
• Step 4: Make a Plan: Roadmap for achieving the goal of building the Retirement Fund
• Step 5: Implement the Plan
• Step 6: Review the Plan regularly

We saw how Sandeep can go about accomplishing his goal of living an independent retirement life. Similarly with systematic financial planning, you too can realise your dream of living your retirement life on your own terms and conditions.

Do you have a financial goal in mind??? Then what are you waiting for??? Do get in touch with us for your financial planning needs today!!!

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To learn about which mutual funds are good for long term investments, click here.

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