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ToggleWhat do you plan to do after retirement? Spend time with family, travel, or move far away from the city and live a peaceful life. Whatever you wish to do, you will need to plan for it from now itself.
Once you retire, you won’t have a source of income to rely on. Moreover, savings in your bank will hardly cover your expenses as inflation will eat into them and reduce your purchasing power. Since you will need money to cover your expenses during your retirement age, it is important to plan your finances for retirement from now itself.
But the question is will Rs 5 crore be enough to retire peacefully? Whether it will be sufficient or not will totally depend on your expenses and lifestyle. Let’s look at how much you will need to retire and live your golden years peacefully.
The amount you need during retirement will depend on multiple factors, such as your present age, expenses, and inflation. The following factors will help you determine how much you will need during retirement.
As mentioned earlier, the retirement corpus will depend on your expenses, retirement age, inflation, and current investments.
To estimate the funds you need for retirement, let’s consider an example. If your anticipated annual expenses during retirement amount to INR 12,00,000 and you plan to retire in 25 years, accounting for an inflation rate of 7%, it is advisable to have a retirement corpus of approximately INR 3.6 crore.
Let’s take another example to understand how to factor in all these to estimate the amount you need for retirement.
Ms Kirti Singh is 30 years old and plans to retire at 65. She is married and has one kid. Her monthly expenses include household expenses of Rs 70,000 per month. She also spends Rs 50,000 per annum on the gym, medicines, and health check-ups. Ms Singh also loves to travel and spends Rs 1,50,000 per annum for travel and entertainment.
After her retirement, she plans to live peacefully, far away from the hustle and bustle of the city. Her expenses are expected to reduce to 60% post-retirement. She currently has Rs 10 lakhs in investment at a rate of 10% per annum.
Let’s see how much she would need to invest at present if the inflation is 7% per annum and the expected rate of return on her investments is 12% per annum.
Current Age(in years) | 30 |
Retirement Age (in years) | 65 |
Number of years to retirement (t) | 35 |
Retirement planning (n) | 30 |
Expected rate of return (R) | 12% |
inflation rate (i) | 7% |
Household expenses per annum | Rs 8,40,000 |
Health expenses per annum | Rs 50,000 |
Travel expenses per annum | Rs 1,50,000 |
Total expenses per annum at the age of 30 | Rs 10,40,000 |
Inflation-adjusted expenses per annum at the age of 65 | Rs 1,11,03,644.74 |
Reduction of per annum expenses to 60% | Rs 66,62,186.85 |
Total expenses for 30 years to live during retirement | Rs 11,30,08,415.90 |
Investments already made at 10% per annum | Rs 10,00,000 |
Value of investments made at the age of 65 | Rs 2,81,02,436.85 |
Total investment to be made to meet the retirement corpus | Rs 8,49,05,979.05 |
To meet the retirement corpus, the one-time investment to be made | Rs 16,08,079.37 |
To meet the retirement corpus, the yearly investment to be made for 35 years | Rs 1,75,257.88 |
To meet the retirement corpus, the monthly investment is to be made for 420 months | Rs 15,404.31 |
To retire peacefully, Ms Singh would need Rs 11.30 crores by the time she turns 65.
From the above table, we can see that Ms Singh’s expenses per annum would be Rs 66.62 lakhs at the time of retirement. Her total expenses for the duration of her retirement would be Rs 11.30 crores. This is calculated after taking inflation and the expected rate of return on the investments she will make.
Since she already invested Rs 10 lakhs at the age of 30 at 10%. The value of these investments at age 65 would be Rs 2.81 crores. Hence, she would need to plan to invest only Rs 8.49 crores (Rs 11.30 crores – Rs 2.81 crores). To have a retirement corpus of Rs 8.49 crores, Kirti would need to invest Rs 16.08 lakhs as a one-time investment.
If she plans to invest yearly once, she will need to invest Rs 1.75 lakhs per annum for 35 years. Alternatively, she can invest Rs 15,404 per month for the next 35 years (420 months) to get a corpus of Rs 11.30 crores.
If Kirti started planning for retirement earlier (in her 20s), she would be investing less than Rs 15,404 a month as she would have a longer duration until retirement. If she started her retirement planning at the age of 40, she would have less time until retirement and would have to invest more. This means that the earlier you start your retirement planning, the better it is.
Retirement is a long-term goal. If you start planning for it right from the time you start earning, you will have 30-odd years to save for retirement. The market has multiple securities that qualify for long-term investments. Some of them are listed below.
Mutual funds are securities that pool money from multiple investors and invest in equity, debt, and government securities. There are different types of mutual funds, such as equity, debt, and hybrid funds. For the long term, equity mutual funds are the best. This is because they have the potential to give high returns in the long term.
If you have more than five years of tenure, equity mutual funds should be your go-to investment. As you approach your retirement age, you can redeem your funds from equity and invest in debt mutual funds to protect your principal.
Although mutual funds have no lock-in period, you must keep in mind that they are marketable securities, and the returns depend on the market. Moreover, the profits are taxable at the time of redemption.
A public provident fund (PPF) is a government scheme that pays a fixed return of 7.1%. It was introduced in 1968 to encourage savings.
Since it pays a fixed return and is backed by the government, it is a risk-free investment. Moreover, the investment, interest and maturity corpus are exempt from tax. Hence you need not pay any tax on the gains you make.
The minimum investment is Rs 500, and the maximum is Rs 1,50,000 per annum. You will have to make the deposits at least once a year for a period of fifteen years to keep your account active. PPF has a lock-in period of fifteen years. So this means that once you invest in this scheme, you won’t be able to withdraw it for fifteen years. However, you can avail of a loan on the PPF amount or withdraw the amount partially after five years. All major banks and post office offer PPF. You can directly invest in it online or by visiting the branch physically.
A national pension scheme is a government-sponsored pension scheme that was launched in 2004. It is regulated by the Pension Fund Regulatory and Development Authority (PFRDA) and the central government.
The scheme encourages subscribers to invest regularly during their employment tenure to get retirement benefits when they turn 60. Out of the total corpus accumulated, 60% is paid in lumpsum during retirement. The rest 40% is paid as a monthly pension for the rest of your life.
NPS invests a portion of the investment in equities. Hence the scheme doesn’t guarantee any returns. Historically, the scheme gave around 8-11% return per annum. The asset allocation is decided based on your age and the fund manager you choose. The government has authorized a few fund managers to manage NPS investments, and you can choose your manager at the time of investment.
The scheme qualifies for tax benefits under Section 80C and Section 80CCD of the Income TAX Act, 1961. You will also get a tax exemption of the 60% of the lump sum amount you withdraw. The rest 40% will be taxed as and when you receive the pension.
All three are good investment alternatives for long-term investments. You can invest in all three to diversify your investment portfolio.
Once you retire, you will not have any source of income. Without an income, you will not be able to cover your expenses. Hence you will have to look out for your future self from now itself. Following are some of the reasons why you should plan for your retirement now itself.
Before planning your retirement, there are certain things you must keep in mind.
Retirement years are the golden years of your life. You should plan on living them peacefully without any stress. To make your retirement stress free, start investing from now itself. The earlier you start, the more the corpus you can accumulate. If you haven’t started retirement planning already, now is the right time to do it. Better late than never, right?
Happy retirement planning!
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