Planning For It!

Start young, retire rich

Dude, are you kidding? That sums up the responses we got from a bunch of under-25s when asked about their retirement plans. Like most others their age, they say they will plan but later . The problem is that later generally turns out to be too late. Outliving retirement savings is a very real risk, given the advances in medicine and healthcare and the depredations of inflation, recession and bear markets. A study earlier this year by Ernst & amp; Young and the Americans for Secure Retirement group found that in the US, 39-72% of the population (varies according to states) will, in all probability, outlive its savings. Indians might not be much better off.

When Rohan Sukhatankar, 32, started working, he did not give retirement planning a thought. That perception changed two years into my job, he says. His first paycheque was spent on buying gifts for his parents and on partying with friends. The subsequent ones were used to fund part of his cherished wish-list. Essentially, all Sukhatankar was doing was spending, with no thought of saving, let alone planning for a rainy day. Had we asked him about his retirement plans in those heady days, we'd have been shown the door. The problem is that most people confuse retirement with retirement planning. Yes, it seems bizarre for a 23-year-old to contemplate opting out of the workforce that he has only just joined. But this is the time when he has no other financial commitments and can afford to start saving towards that day.

Shipla (29) & amp; Rohan Sukhatankar (32)

Both husband and wife contribute to a retirement plan, which Rohan started in his mid 20s as a savings plan for an undefined goal

We have included our son's needs in our plan, and try to put away any unexpected funds into that

Ravi Kumar (left), 48 Bengaluru

Did not realise the benefits of early planning till too late

I started late and have a lot to catch up on. However, I plan to top up my retirement corpus with some of my investments that will mature now

TC Dinesh (right), 36 Bengaluru

He puts away 20% of his investments into a retirement corpus, but will reduce the contribution as his children grow older and their financial needs grow

I have clear investment plans for my different financial goals including retirement

The bad news is that India does not have any form of social security, so it's up to us to ensure that we have enough to maintain our lifestyles after retirement. The good news is that most people have at least the core of a plan in the form of a provident fund. By default, being an employee forces you to contribute towards a provident fund, which acts as a forced thrift for retirement planning, says Gaurav Mashruwala, Mumbaibased financial planner and author of Essential Guide To Carefree Retirement.

Sadly, the provident fund is not going to be sufficient. You need a retirement plan so that you will have enough money to lead a comfortable life in your 70s (or later) without compromising on your lifestyle. To get this amount, you need to start planning and saving as early as possible. Starting in your 20s means that even if you invest only a small amount every month, it has time to grow, thanks to the power of compounding and the advantage of tax-deferred growth.

Planning for retirement is a lifelong process, not just something you worry about once you are nearing it. But a good way to start working towards your retirement plan is to set a financial goal, a roadmap that will lead you to it. When planning for retirement, a moot question is how much is enough, says Kolkata-based Rishi Nathany, director, Touchstone Wealth Planners.

There are two ways to arrive at how much your nest egg will add up to income replacement and expense replacement. The former is more useful up to 40 years when you are aware of your income, while the latter works better as you approach retirement, because by then you will have a better fix on your household expenses and know how much you will need in retirement.

Experts in retirement planning say that you'll need to replace at least 70% of your final pre-retirement income to maintain your standard of living. And as trying to get to that level in 10 years before retirement is nearly impossible, unless you win a lottery, it is important you start early and start with regular sums, however small they may be. But why 70%? This is because your expenses will be much lower, as debts like home and car loans will hopefully be paid off, children will no longer depend upon you for funding, and work-related expenses like commuting, clothes or eating out will be much lower.

However, you are likely to spend more on utilities—AC, heater, fans, and phone—since you will be at home for longer periods. If you have children who stay in a different city or country, you need to account for travel expenses. Also, remember that healthcare costs could go up as agerelated medical problems crop up.

Chennai-based Jagadeesh Sridharan is only 25, but he has a pretty good idea about how much he'll need to retire comfortably when he's 50. I shall put Rs 10,000 a month into my retirement corpus over the next 25 years, says the chartered accountant. Sridharan has accounted for the power of compounding working in his favour and has also factored in the benefits of tax breaks. At a conservative 8% growth, he estimates that his savings over the next 25 years will result in a retirement nest egg of at least Rs 95 lakh. Take into account a few bull runs, windfalls and an increase in Sridharan's earning (and, therefore, savings), and he can easily end up with well over Rs 1 crore in his retirement kitty.

TC Dinesh of Bengaluru is 36 now, but had started planning for his retirement over a decade ago. He began by investing around 20% of his investible surplus in a retirement plan, aware that, over time, the needs of his financial dependents would see a reduction in this amount. As my children grow older, their financial needs will overtake my retirement plans for a few years, he says. But till this happens, Dinesh knows that the beneficial effects of compounding will see his existing savings grow.

As both Sridharan and Dinesh know, it's okay to start small, but it's essential to start young. For those who do not enjoy the benefits of a PF deduction, it's a good idea to start contributing, however little, to a longterm retirement plan regularly. There are both active and passive plans that one can look to invest in. For instance, a PPF account is passive, whereas a mutual fund or a unit-linked pension plan from insurers is active, says B Srinivasan, a Bengalurubased financial planner.

Gaurav Mashruwala, financial planner

“Contribute regularly to a structured plan. The power of compounding will work over 25-30 years”

Myth: If I have a retirement corpus of Rs 1 crore, I've made it

Fact: If you earn a six- figure salary today and don't plan to retire to a cave in the Himalayas, you need a lot more than Rs 1 crore. That's because Rs 1 crore will last you 18 years if you withdraw Rs 10 lakh a year and 4.5 years if you withdraw Rs 25 lakh a year

Sukhatankar, Sridharan and Dinesh can all look forward to a decent retirement corpus. Like them, you can start saving regularly; retirement planning early means you don't have to choose between current financial obligations and saving for retirement. Saving even small amounts while you're paying for your obligations can ensure that compounding works in your favour.

Pay yourself first and have money deducted automatically from your paycheque or set up automatic savings from your bank account, so you save before you can spend, advises Mashruwala.

This is something 48-year old Bangalore-based T P Ravi Kumar wishes he had done. He started thinking of retirement planning when he was well settled in his career and is now wondering if he has enough to live on. I settled down late in life and my concern today is to provide a basic financial support in life for my wife and with a 2-year old daughter, he says. What Kumar has done is to invest in financial products that will start maturing after 12 years. This will create an income stream if he decides to retire from active work then. If I had thought of retirement planning when I started working, I would be less worried today, he says.

Obviously, the benefits of starting retirement planning It boils down to this: for the price of a couple of weekends spent clubbing every month, you can spend 20-30 years of your life doing pretty much as you please. Start late and by the time you have enough to retire on, you'll probably be too old to do all the things that you dream of now.

Are you on track?

To make sure that you don't outlive your retirement corpus, make sure that you have some exposure to the following

Make sure you have cover for 10 times your annual income, along with health insurance cover worth at least Rs 2.5 lakh

Make sure that at least 20% of your investible surplus is in the stock market, preferably in direct equities

Real Estate
Put away a specific amount to make the down payment for a house; start paying off the home loan when you are in your 20s

How much do you need

In your 20s, the best way of calculating how much you need in your retirement corpus is to use the income replacement method illustrated below. The expense replacement method that follows might be a better bet for an older person


25 Current Age

60 Expected age at retirement

35 No of years left for retirement

80 Life expectancy

20 Years after retirement

Rs 3,00,000 Current annual income

7.5% Expected annual growth in income

Rs 37,70,661 Annual income at retirement age

8% Rate of return on retirement corpus

6% Inflation rate

1.89% Inflation adjusted rate of return

Rs 6,35,10,757 Retirement corpus

Rs 9,875 Monthly savings to reach corpus


45 Current Age

60 Expected age at retirement

15 No. of years left for retirement

80 Life expectancy

20 Years after retirement

Rs 15,00,000 Current annual expense

7% Expected annual growth in expense

Rs 41,38,547 Annual expense at retirement age

80% Portion of current annual expenses required
post retirement

6% Inflation rate

1.89% Inflation adjusted rate of return

Rs 5,57,65,770 Retirement corpus

Rs 1,11,625 Monthly savings to reach corpus

Article sourced from Money Today.

Published Dec 10 2008




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