Financial is catching on in India but it still remains a low priority for most people. According to a recent survey by PGIM India Mutual Fund, 51 percent Indians haven’t worked out any retirement plan and this number is as high as 68 percent for people who earn less than Rs30,000 per month.
In fact, retirement planning is more important for people in the low income bracket than high income earners. The latter most often have a secure job with perks like provident fund and employer-funded health insurance or are self employed, which gives them the option to stretch work till their health permits.
In contrast, people with low incomes tend to be in irregular or contractual employment with few social security benefits. This makes it even more imperative for them to save for the rainy day, including retirement.
On the face of it, retirement planning sounds arduous and even depressing to many. People would rather plan for their kid’s education or wedding or buying a house than think of old age. But you need to bite the bullet if you want a worry-free and dignified old age. If you keep some thumb rules in mind, retirement planning can become a breeze. Here are a few things to help you while planning for retirement.
1. Work out your current living expenses – food, fuel, entertainment, occasional shopping, travel and holidays, children’s education, healthcare. Then work out your average monthly expenses over a 12-month period. Now think about which of these expenses you want to maintain post-retirement.
Now if you don’t want to compromise on your lifestyle or the level of comfort, you need to plan for a corpus that will give you the cash flows post-retirement to allow you to pay for all these expenses.
2. Think retirement, think inflation. One of the most important variables to keep in mind is to estimate the rise in prices of goods and services in one consumption basket over the years. What inflation does is to reduce the purchasing power of your money over a period of time. For example, at an annual inflation rate of 5 percent, a person or family with a monthly living expense of Rs30,000 would need to spend nearly Rs1.1 lakh per month after 25 years to maintain their lifestyle at the current level.
3. Retirement planning always involves a trade-off between present and the future. Most people assume that retirement planning can be deferred to a later stage when our income will be high, leading to little or no trade-offs. In real life, expenses keep pace with one’s income leading to little change in the surplus or the discretionary savings. The later you start, the more you will need to save per month to achieve the same milestone in terms of the corpus. Late starters also lose on the gains from compounding.
Start with small savings and increase the amount as your income rises. A simple back-of-the-envelope calculation suggests that a monthly savings scheme of Rs10,000 in an instrument with 7.75 percent return per annum and annual increment of 5 percent will grow to a corpus of Rs1.44 crore after 25 years.
4.How much I need to save? As a general rule, you should set aside 30-35 percent of your current living expenses for retirement planning every month. For example, if your monthly expenses excluding EMIs on car and home loans are around Rs 30,000 per month then you need to save around Rs 10,000 per month in an instrument where returns are higher than the inflation.
5. Lastly, a retirement fund should be for earning recurring cash flows in the old age rather than funding big-ticket expenses. One should not withdraw more than 5 percent from the retirement corpus in a given year and the rest should be allowed to earn interest and grow in value. This way, one can easily stretch a retirement fund for 25-30 years even assuming 5 percent annual increase in the rate of withdrawal. And if one is disciplined enough and sticks to the 5 percent withdrawal limit year-on-year, the fund can last forever.
(Karan Deo Sharma is a Mumbai-based finance and equity markets specialist).