Retirement: Not an end, but a new beginning
Many will plan for retirement but still, there are people who want to work till they die. It sounds good. What if things go wrong? There are two things: one- your health, two- the ability to work. Your aging body can lower your immunity and can reduce the work you do. As you age, you might feel difficult to cope up with the new skills which earn your bread.
So, it is better to have a plan for retirement to set yourself financially free. “Financially free – where you don’t need to work to pay your bill and have enough assets that earn you returns for today and for the rest of your life”.
You can be financially free only if you have answers for these questions:
- How can you plan for your retirement?
- How much is enough?
- How can you know that you are on track?
You know that you need a large amount of money to achieve a big goal for the future. Here are the two principles – “Start early” and “forecast your expenditure” (double the figure to provide better) which will guide you and will answer questions that poke you.
If you don’t have a single rupee saved towards your retirement, it’s better to start now.
- At the age of 25 save 25% of your post-tax earnings.
- At the age of 30 save 30% of your post-tax earnings.
- At the age of 40 save 40% of your post-tax earnings.
Example: At the age of 40, if you don’t have a single rupee for your retirement then you need to be saving very hard. If your post-tax income is 1 lakh then your savings will be Rs 40,000 (40% of 1 lakh). The conclusion which you can draw from the above example is – the younger you are, the less you need to save.
What happens if you start saving at the age of 40? If you are planning to retire at the age of 60 then the time left for saving is only 20 years which is very difficult to pull 40% of your earnings.
Forecast Your Expenditure:
The better way to know your retirement corpus is to look at your current expenditure each month and each year because the same level of income people will have a different level of spending. You just need a simple future calculator to know how much your retirement corpus should be as of today.
For example: At the age of 30, if your current annual expenses are Rs 6 lakhs and assuming inflation of 6%, in 30 years, at the age of 60, you will need Rs 34.46 lakhs a year.
Generally, you’ll be spending 70% of your pre-retirement expenses in the very first year of your post-retirement. This is because of expenses like food, travel costs, and other expenses will reduce once you retire. Suppose if you’re spending Rs 1 lakh before your retirement then Rs 70,000 will be post-retirement expenses.
Do you think the value of Rs 70,000 will remain the same in the future? No, again this 70,000 will start creeping up due to inflation. Let’s do maths using “Rule of 72”. Now, we assume inflation will be 6% in the future and divide 72 by 6. This means that your expenses will double every 12 years once. Assume that your current expenses as 1 lakh.
|12 years||1 lakh|
|24 years||2 lakhs|
|36 years||4 lakhs|
|48 years||8 lakhs|
Here, in this table, you’ll get to know the number of years it would take to double your current expenses.
The immediate question that hits your mind is “How much fund do I need at Retirement?”
You are targeting a retirement fund that is between 18 to 35 times of your annual spending at the age of 60. For example, if your annual spending is Rs 12 lakhs at the age of 60 then your retirement corpus will be around Rs 2.2 crores.
We make a lot of assumptions to predict and figure out our future. There are too many things that can change along the way-
- The inflation could drop or grow, you may earn the expected returns/ may not,
- You could have a healthy life or you may battle with some diseases and your calculations may go wrong.
There is no perfect way to predict the future, the only thing we know is what we can do today. All these are an approximation of what you need.
We all will plan, but how do we know that we are on track. You should develop a retirement guideline to map the journey of retirement over the years.
|At the age of forty||You should have 3 times of your annual income as your retirement corpus already.|
|At the age of fifty||You should have six times of your annual income as your retirement corpus.|
|At the age of sixty(at retirement)||You should have eight times of your annual income as your retirement corpus.|
Many will doubt if one can save so much in their earlier years taking into consideration other expenses like kid’s education, their marriage, and a house.
Remember that you need to save only if you don’t have a single rupee as saving. If you have any savings or other assets then your target for retirement corpus will come down. Count all your balances in PF, PPF, fixed deposits, gold or real estate to know how much you have in your money box. The ’30s and 40’s in a householder’s life are the decades of high expenses. But at the ’50s is when there is high income and low expenditure because you are at the peak of your earnings and your kids will be financially independent.
Though you build funds for your kid’s education and marriage, it’s better to have an eye on your retirement corpus. This is a big goal for the future. The earlier you begin, the better it is. A small amount can grow into big amounts if you put them in the right fund.
Invest in National Pension Scheme on MyWay Wealth, get yourself a good retirement corpus and enjoy your tension-free Retirement Life.
Everyone deserves a peaceful retired life after working so hard. Let your money work for you.