While planning your retirement corpus, one needs to think through two very important questions. Looking into the future, especially many years hence is difficult, but one needs to give it due consideration.
1. Firstly, can your retirement corpus cover for inflation in your annual expenses?
Let us say you are planning for an annual expense of Rs 10 lakhs (assumed for the purpose of simplicity) and you plan for your retirement corpus accordingly. Assuming a 5%-6% inflation, this expense will double every 12-14 years. Your annual expenses will creep up inch-by-inch every year and one needs to plan for the income from retirement corpus to keep increasing in line with inflation.
The way to do this would be to invest in financial assets where the expected long term returns is 4%-5% ahead of inflation.
2. The second question is a bit more complex – do you want to maintain your relative strata in the society?
The Indian economy is constantly growing and the average per capita income is also growing. As a result, the quality of lifestyle that people, at large, enjoy will keep improving. India’s per person GDP was $ 100 in 1968 and currently close to $ 1,800. Assuming a similar trajectory, in about 30 years, India’s per capita GDP should be $ 13,000. Imagine the lifestyle that you can afford with your retirement corpus in 30 years from now.
- There was a time when a vacation meant a visit to a nearby hill station or a temple town or a visit to our hometowns. These days, a foreign vacation is considered the new normal for the somewhat affluent in India.
- There was a time when a Bajaj Scooter was the family vehicle of choice, which then moved to a Maruti 800 and now to some bigger cars.
- There was a time when one landline phone at home was the default communication device. Now one has more than five communication devices at home.
Quality of life of people will improve significantly over the next several years. The nature of goods and services the common man can afford would be significantly better than what is currently being consumed. The question to ask is whether your planned retirement corpus will allow you to keep pace with the increasing quality of life over the next several years, as you get more time to enjoy life.
Let us assume you are in the top quartile of the current social strata. Is your retirement corpus sufficient to ensure you will continue to be in the top quartile in 30 years? Especially so in a high growth economy like India.
This is a difficult question, but do face up to it. Upon retirement, we are sure you would like to keep pace with the lifestyle of your peers and others in the society.
The way to address this is to plan carefully and you may find that you actually need to plan for a much higher retirement corpus.