If we were to ask you whether you are saving for retirement or not, many of you are likely to say yes. In our several years of meeting investors, everyone plans for saving enough for retirement.
But if we were to ask the same investors whether they can maintain the same lifestyle they now have decades into the future, they start scratching their heads. Many people have a number in their heads which makes up their dream corpus but rarely do they consider if this dream corpus will actually allow them to maintain their lifestyle, years later.
What people believe about retirement
Most people around the world want to work for up to 30 years and live a retirement that is generally well over 30 years. Considering that lifespans are now going up well into the 90s, a retirement lasting for 40 years is likely to become the norm rather than the exception. Paying for such a long retirement means working for more years, just to be able to afford the retirement. The problem is that the vast majority underestimate how much they will need to retire. Gone are the days when reaching a crore in India meant you were ready to retire in style.
Answer these three important questions, before you plan your retirement corpus.
1. Is the house that you live in paid for?
2. Are your total financial savings (apart from your home you live in) equal to (or greater than) 25 times your current annual expenses.
Only if you fulfil the above stated requirements, can you consider yourself prepared for retirement.
3. You also need the courage and conviction to invest wisely to generate about 4%-5% above inflation rate of return (if inflation is 5% now, your portfolio should generate nearly 10% to ensure you retirement is covered).
How does the math work?
Do you have sufficient financial corpus built (plus you own the house that you live in) which can cover your expenses for the rest of your retirement period.
As long as the total corpus is 25 times your current annual expense and you have sufficient conviction to invest in inflation beating assets, your current lifestyle is broadly covered for.
For example, if the current annual expense is Rs 10 lacs (not including home EMI, or rent) and you have a corpus of Rs 2.5 Cr, the math works as follows.
- If Rs 2.5 Cr is invested in a portfolio which earns 10%, you make Rs 25 lacs that year. You take out Rs 10 lacs, for your consumption needs. Allow the remaining Rs 15 lacs to continue to grow the portfolio.
- This way, in the next year you can use Rs 10.5 lacs and this will keep increasing in line with inflation. Remember, your expenses will double every 12 years.
The retirement corpus you plan for should generate an income which keeps growing in line with inflation.