Most of you will not get any pension when you retire. The age of getting a safe, solid and a reasonable pension got over several years ago.
So unlike our earlier generations who were lucky enough to get a pension, our generation would get nothing. We are on our own. And even though pension isn’t there, our expenses won’t stop. You have to eat food, pay your bills, etc. whether you earn or not, whether you work or you retire.
So without the pension, you really are on your own in this new era. This is the retirement bomb that is ticking away.
Retirement, as a life stage is pretty simple – Your salary stops. So to meet your expenses, you will have to depend on your savings, called retirement corpus in this case. This retirement corpus has to be deployed in a prudent manner to ensure protection as well as sufficient growth and more importantly, to ensure that it does not get exhausted before you die.
And this is not going to be easy.
Because the gap between retirement age and life expectancy is increasing. Most Indians won’t die soon after retirement. Many will live up to their late 80s.
This means that the retirement corpus should be large enough to last for 25-30 years. So money should last that long.
When it comes to retirement planning, the first step is to figure out how much regular income would be needed in retirement to meet retirement expenses. Once that is estimated, the second step is to calculate the retirement corpus needed to fund such a retirement income. And the third step is to find out how much to save regularly to accumulate the target retirement corpus.
This is retirement planning in a nutshell.
So how do you actually figure out how much regular income would be needed in retirement?
For that you need to estimate your expenses in retired life. This is difficult given that retirement is decades away. But there is a way to assess it to some extent. Chances are that only a portion of your pre-retirement expenses will be applicable in retirement. This in turn will translate into lower-income required to meet those expenses. Technically, this is what is referred to as the Income Replacement Ratio. Thumb rules range from 60 to 80%. But it can be different for different people.
Remember that this is a no-pension era. How does it matter in this context?
The basic need for retirees is regular income (call it RI). This required income will be made up of 2 parts – Pension Income (PI) and Income from Corpus (CI). So RI = PI + CI.
In zero pension era, PI is zero. So the retiree is solely dependent on the retirement corpus for income (CI), i.e. the savings & assets piled up over the years and deploy them to make a viable stream of regular post-retirement income.
Let’s say that before retirement, your expenses were Rs 75,000 a month. Now after retirement, you have estimated it to be about Rs 50,000 a month. If you had a pension of let’s say Rs 35,000, then it would have taken care of a part of the expenses. The remaining (Rs 15,000) would have to be managed somehow – ideally via the retirement corpus. So lower the dependency for expenses on retirement corpus, lower will the corpus requirement.
Next using the required starting ‘post-retirement income’, you need to do some retirement maths to find out how much retirement corpus is needed? This isn’t really a simple maths and requires some skill.
And no… don’t pick a random number like Rs 1 crore for retirement, Rs 2 crore for retirement, etc. It won’t work.
It is worth noting that unlike other goals, the retirement corpus is not meant to be spent in one shot. That aside, all retirement calculations are subject to several assumptions and the calculation itself is highly sensitive to all inputs. It is for this reason that retirement planning has been called as the nastiest problem in finance. You can try doing it on your own. But if you can’t, better to take the help of an investment advisor.
Remember, you have just one shot at retirement (If the retirement corpus is less and, there is a danger of running out of money to live on in old age). So you don’t want to be wrong about it.
The third step in your retirement plan is to figure out how much you need to invest regularly to reach the retirement corpus, which is well-defined in terms of target corpus and the number of years left to get there.
The decision also has to be taken with regards to the kind of asset allocation you wish to have in your retirement savings.
Most people already are saving some money by means of Employee Provident Fund (EPF) and/or NPS (National Pension Scheme). But the EPF NPS contributions will not be enough to fund a proper retirement (in any case, try not to touch your EPF corpus before retirement as it will further deplete the already inadequate retirement savings in EPF).
So where to actually invest?
If there are several years (or decades) left in retirement, it is advisable to have a major component in equities. When it comes to introducing equity in the retirement equation, it has been found that retirement planning using SIP in equity mutual funds works best.
How you construct a good mutual fund portfolio and funds you select from correct fund categories is also important and a big determinant of the returns your investments will generate.
Once again, if this gets you confused, taking help from an advisor is recommended. Remember, free advice is easily available. But a few pieces of good advice can be worth years’ worth of fee paid to the advisor.
And beware… don’t fall for the thumb rules like ‘Save 10% of your Income for Retirement’ when figuring out ‘How much should I invest/save for retirement?’ The idea of saving a percentage of your salary sounds appealing and comforting but it rarely works.
This is in a very broad sense of how the retirement planning thought process works – with or without the benefit of pension. Since it’s your life and there are tons of retirement investment products available and being sold by not so good people, it is in your best interest to ensure that your retirement savings plan is good enough for your actual retirement.
You don’t want to run out of money when you are old. Right? And you also wish to take some action to ensure you can maintain the standard of living in your grey years.
So if after all your retirement calculations it is evident that you are not or unable to save the required amount for retirement, then its time to pull up your socks. If need be, get rid of unnecessary expenses, deprioritize other financial goals (remember you get loans for all other goals except retirement) and start saving properly for your retirement. Do whatever you have to do!