Retirement might be few years or far down the line. And you might be saving for it. The key question that would-be retirees ask is, how will my retirement lifestyle be? And what will I be able to afford?
Here are some factors to know:
Consider your retirement lifestyle
Usually, one can live retirement with 80% of the income earned at the time of retirement. Why is that so?
That’s because once you retire, you’ll be able to eliminate certain expenses. For instance, you would no longer have to save for retirement and also spend less on commuting related to work.
After retirement, heading to your hometown, where expenses are lower, could mean you could do with 70-80% of pre-retirement income. However, if you are planning a lavish retirement lifestyle, then you need to earn at least 90-100% of it.
Your affordability depends a lot on the retirement lifestyle chosen and the accumulated corpus.
Factor inflation that will be in play during your retirement
Annual consumer inflation is inching up by 6-7% every year, while education and medical expenses are moving up at 10% rates annually. If your annual household expenses are Rs 6 lakh now, it could be Rs 12 lakh over a decade. So, do the math and build a retirement corpus accordingly.
The general thumb rule is to have at least 25 times the annual household expense at the time of retirement as your retirement kitty. It will ensure your portfolio lasts for about 25-30 years after retirement.
If you are falling short, then you might have to adjust your lifestyle or find alternative income sources.
Extent of equity in a retirement portfolio
Retirement affordability is also affected by the extent of equities in your retirement portfolio. After retirement, if you plan to go 100% into debt, then this will grow steadily but only at 5-6% annual rates (current assumption).
Having equity will potentially let the portfolio grow by 10-11% annually. It is considered smart to have around 50% of the post-retirement portfolio in equity.
For instance, if you have 100% debt, Rs 1.5 crore will last for 25 years with a monthly expense of Rs 50,000 in the first year. However, if you are investing 50% in equities, your affordability will increase by 30% as you could spend Rs 65,000 monthly in the first year and yet see your kitty last for 25 years as before.
In effect, your annual drawdown rate could increase from the usual 4% to 5.2%, after accounting for yearly inflation.
These calculations assume that debt earns 6% as against 8.5% for a hybrid portfolio (equity and debt) while monthly spends increase by 6% every year. The investor however needs to ensure there is no exit-based portfolio risk by adopting a bucketing strategy and gradually reduce equity exposure in the portfolio.
Hedging the unexpected
One of the major fears for retirees is that of unexpected medical expenses and other big unplanned expenses. Having a separate emergency fund for this helps and so does having comprehensive health insurance.
Keeping up with the Joneses
Remember that the lifestyle of Indians is going to improve in the future with improvement in income levels. A decade back, a smartphone might not have been a necessity, but now it is. Essential innovations like these cost money and you need to build a bigger corpus for that.
Overestimating what your home is worth
Many retirees expect their house property to provide sustained rental income. However, it is not exactly reliable. For one, there could be no occupancy for a few months or you might have to do with lower rentals in case of excess supply of rental properties in the vicinity.
Moreover, older properties are difficult to sell and even if it is sold, it is done so at a discount to new property rates and with associated tax implications.
Well-calibrated equity exposure in your post-retirement portfolio is the best way to cater to the affordability factor.
How can you plan for a retirement where affordability is not a challenge? We got you covered with Scripbox Retire Confident!