Retiring Rich – Calculate Your Future Financial Needs

The important goal or aim of retirement planning is to have a secure and financially independent retired life during our golden years. This goal can be further broken into objectives such as:-

  • Regular post retirement income (pension, interest/earnings from investments, etc.)
  • A corpus of savings/investments that you can dip into for additional expenses  and emergency needs
  • A safe shelter or home where you can live on your own terms

Achieving all of these may not be feasible for everyone, but if you have different sources of income and investments already in place, you are on the right track.

Use the Power of Compounding to enhance your retirement corpus and achieve you r retirement goals. In order to achieve your retirement goals and objectives – you need to have the right amount of corpus to take care of your regular needs post retirement. The corpus should be good enough to take care of your regular expenses and needs after retirement.

Let’s assume you retire at the age of 55 and you expect to live till the age of 75. Based on your current expenses and inflation rates, you work out a figure that represents your future monthly income (let’s say Rs.50,000 per month). This means you will need 6 lakh per annum for a 20-year period, which means you need Rs.1.20 crore for your retirement. Now this is not sufficient. We have not taken in inflation into account.

If we assume the inflation rate to be 7% p.a., the total corpus requirement works out to a whopping Rs.2.46 crore. This is the power of compounding. So if you need to accumulate this kind of money – you need the following: –

Time/Tenure: Save and invest early so you have more time to allow your money to grow.

Being Systematic/Disciplined: Save and invest regularly to ensure that your investments grow at a steady rate.

Growth: Invest in assets or investments that create value and beat inflation.

 

Aamir vs. John: Who Has a Better Retired Life?

Take a simple case of two friends – Aamir and John. Aamir worked for a bank and earned a decent salary whereas John worked for a software firm and earned handsomely. Hence Aamir managed to save only half as much as John saved (i.e.Rs.5,000 against Rs.10,000).

Aamir had a normal lifestyle and started saving at the age of 24, while John thought that investing is not important and postponed it until he reached the age of 34. Both of them plan to retire at the age of 54. John did not have any financial difficulty or lack of savings, but rather wanted to enjoy his earnings and life by spending on fancy motor bikes, branded apparel, expensive shoes, parties, etc. A higher bank balance and salary enabled him to afford such a lifestyle.

When both of them decide to retire at the age of 54, Aamir ended up with a corpus of Rs.2.75 crore while, John ended up with a total corpus of just Rs.1.30 crore. How was Aamir able to accumulate more than double the sum accumulated by John? This is due to the power of compounding over a large tenure and a regular and disciplined savings.

If John had followed the philosophy that Aamir imbibed, he would have ended up with Rs.5.49 crore. This is one of the biggest mistakes that young professionals make. Retirement is thought of as an old age phenomenon and things like pension, planning for future, etc are looked at as boring or old age philosophies

Why is Aamir better off than John?

Aamir will have a comfortable retirement and the resources to manage the same or equivalent lifestyle post retirement. John will have a lot of hiccups post retirement, because he may have to sacrifice his lifestyle or curtail expenses. Even if one argues that John can make up in other ways it does not work well because he is left with a corpus that is half as big as Aamir’s. So in rational terms, John’s cost of living will have to be curtailed to half as much as Aamir’s to help him sustain himself, assuming both have an equivalent life span. Keeping all other factors common or constant, Aamir wins the race. The above case study is not very different from the story of ‘The Hare and the Tortoise.’

Conclusion

We have established the importance and need for retirement planning, and we also know how regular consistent and long-term savings can help you build a corpus for a comfortable retirement. You do not need to live a frugal life and save and invest as much as you can to reach your retirement goal. There are other goals, responsibilities and commitments that are equally important too. These can include your child’s educational needs, an annual vacation, buying a home, etc. While some of the discretionary expenses such as shopping, cosmetics, furniture, apparel, etc. should be controlled, you do not need to live the life of an ascetic. You need to prioritize different aspects of life and plan properly and reach your goals. Start today so that you can grow your corpus to a level that can get you closer to a comfortable retirement.

 

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