Retirement is an inevitability. It could happen at different ages for different people. It doesn’t always mean that you give up active work immediately, but it does mean that your regular income stream will reduce or even stop once you retire.
Saving for retirement is about being able to replace your regular active income or earning with a passive income from your investments.
This is important if you want to continue living life on your own terms, keeping up the lifestyle you are used to without depending on anyone.
It is your savings that will help you lead a comfortable retired life, what’s important is how you treat those savings before you retire. The first step is to figure out how much you should save for retirement. That depends on how much you think you may need.
The retirement calculation
You can arrive at a reasonable estimate of how much monthly income you might need in future once you retire.
You can do this by extrapolating lifestyle expenses and adding the impact of inflation. However, you have to filter through the expenses.
Let’s say that at present, you need Rs 3 lakhs a month for basic expenses including cost of home – rental or EMI – daily food and utilities. This includes other expenses like children’s school fees.
From this amount reduce those variable expenses that will no longer affect you in retirement. For example, usually, monthly expenditure related to children will not be there once you retire.
What you will be left with is the chunky expense on the cost of the home and what you tend to spend on yourself. Other than that there will be some utility and grocery costs and increased expenditure on health care. From this, you can even reduce the cost of the home if your EMIs are likely to be over by then.
The figure you are left with will give you an approximation of what you need today if you retire.
Inflate this figure with an estimated annual inflation of 6%-8% for the number of years remaining to your retirement.
For example, let’s say you arrive at a figure of Rs 1 lakh that you need every month post-retirement which is 10 years away. Inflating it by 6% a year means you will need roughly Rs 1.8 lakh a month, after ten years when you retire.
Assuming you will live for the next 25 years and every five years your expenses go down by 15%, then you need a total corpus of Rs 4.3 crore for your retired years. This does not include any frills like travelling or gifting or giving.
How much should you save today?
You have to invest your savings in a way that you are able to earn at least more than what inflation takes away from the value of your money. If we assume annual inflation of 6%, it means your post-tax investment return per year should be more than that.
If you have 10 years to invest towards retirement, then you need to put away Rs 2 lakh a month to achieve a Rs 4.1 crore corpus. This is if we assume a 10% annualised return.
However, remember we are missing the frills in the retirement expenses.
Ideally, you should put aside an amount at least 10-15% higher than Rs 2 lakh a month. This can be in an investment that can earn an annualised return of 10% or more.
Do this if you want to enjoy your retirement rather than just living through it. Financial freedom is critical, no matter your life stage. When you have too little in the retirement fund, you are automatically dependent on children or other family members.
The retirement calculation above may not be precise, however, it will be in the right direction. If you end up with more than you need, it’s an advantage. If you want to be free post-retirement, do your own calculation and arrive at what you need to start saving today to live the life you dreamed of, no questions asked.
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