When it comes to personal finance, the most important question that receives the least amount of attention is whether your retirement savings will be enough for living a comfortable life. People often take a ballpark figure as a goal and consider it adequate without going into details of its sufficiency. Most people consider Rs 1 crore to be an adequate retirement amount. Will it be enough if you retire today? Let's find out.
How long will Rs 1 crore last?
It will depend on an individual's expense pattern. Let's assume that your corpus gets an annual return of 7 per cent and there is an annual inflation of 5 per cent in your expenses. So, if your monthly expense at the beginning of the retirement is Rs 50,000, your corpus will last for 19 years and nine months. If the expense is Rs 1 lakh, it will last only for eight years and 11 months. However, if you have a monthly expense of Rs 25,000 at the time of the retirement, Rs 1 crore will be sufficient. Besides, you will end up growing your corpus to Rs 2 crore in next 25 years.
However, if your retirement is far from now, your expenses will grow up significantly by the time you retire. For instance, if you think Rs 25,000 will be sufficient to lead a good retirement life, you must take into account the inflation. The Rs-25,000 will amount to Rs 51,973 per month factoring in an annual inflation of 5 per cent. Therefore, you should plan the desired corpus, accordingly.
Here are some common factors that you must consider before fixing the retirement corpus:
Your expenses may not go substantially lower
Most people have higher expenses during the accumulation phase when they are actively earning. Besides asset creation, major part of expenses are often related to children in terms of their education and marriage. However, when they retire, most of these goals are taken care of and people assume that they will have considerably lower expenses during retirement. It may be true to some extent but not entirely. During retirement, your social expenses may go up due to more leisure and frequent socialisation. Many people also develop medical conditions, which require regular medicine and treatment that will add up to your expenses. Your health insurance premium will also go up.
Monthly expenses grow even post retirement
Inflation will remain a constant reality during retirement years. "Inflation will continue to act as a major hurdle to achieve the financial freedom after retirement. The inflation will remain inevitable as it will hamper the present value of all your retirement savings in the period when retirement savings will be utilised," says Mehak Tomer, CEO, INVEST19.com. The longer you live, much higher your living expenses will be in the last phase of your retirement. For instance, if you start with Rs 50,000 monthly expense at the age of 60, by the time you reach 80, your monthly expense will have gone up to Rs 1.32 lakh if the average annual inflation remains at 5 per cent. Therefore, the longer you live, the bigger retirement corpus you will need.
Invest your corpus carefully to beat inflation
To guard your corpus against the inflation, you have to invest it carefully. "All you need is to shift the funds that you are currently saving for investing in asset classes such as inflation-linked bonds that will adjust themselves according to the ongoing rate of inflation or any other asset class that may provide enough returns to curb the deviation in your expected retirement funds," says Tomer. Pradhan Mantri Vaya Vandana Yojana, Senior Citizen Savings Scheme, Monthly Income Scheme, Annuity Plans and Bank FDs are the most popular options for investing the retirement corpus for safety of capital and regular returns. If you are planning any other investment option that may have higher risk, it will be better to take expert's advice before investing.