With a host of opinions and views floating around, it is important to make your own estimate

Context
Nowadays, you get a lot of inputs through internet, which is beneficial for you. Social media also gives a lot of inputs, but it is not regulated by any financial market regulator. There is a trend on social media, by a section of financial planners or advisors, of putting forth an amplified number on your required retirement corpus. The logic given there may be correct: increased cost of living in today’s world, your lifestyle, inflation in future reducing the purchasing power of your money, etc. However, the inherent message in those social media posts, though not explicit, is that you require “so much” of money to retire, hence you “come to me” for advice and I will help you create that corpus.

Taking advice from a professional financial planner is always desirable. However, the inducement to do so should not be due to an amplified number propagated on social media to communicate an element of fear. More money you have the merrier, but the estimate has to be in tune with your income and expense level. In today’s article, we will discuss the perspective to look at the requisite retirement kitty.

Estimation of expenses

While it is true that people’s lifestyle expenses have moved up and inflation eats into your kitty, it is about your own lifestyle and expenses, which is unique to you. To each his / her own. Even in today’s world of increased expenses, some families manage their monthly regular expenses at Rs 50 thousand, whereas some families find it difficult at Rs 2 lakhs. Some families have the burden of EMIs, while some families are free on that aspect. Hence it is not correct to propagate one number as the required retirement kitty.

This is a function of your current expenses, your estimate of expenses post retirement and inflation for the remaining years till retirement. It is a common perception that after retirement expenses would move up – apart from inflation – due to medical expenses. However, certain lifestyle expenses cool down after retirement. Today you may desire a fancy car or a fancy phone. With maturity, just a car to travel or a phone to talk would suffice. You may like to visit clubs or eat out today, but in your golden years you would become more sedate. You may have EMIs today, but that will be repaid in due course. Let us take an example. Your current expenses – the usual, regular expenses and not the EMIs or sudden expenses – are Rs 50,000 per month. Let us assume inflation at 5 percent per year. If you have 10 years to go for retirement, due to inflation over 10 years, it becomes Rs 81,445 per month. If you have 20 years to go for retirement, it becomes Rs 1,32,665 per month due to inflation. If your expenses are Rs 2 lakh per month, on the same assumptions, it becomes Rs 3,25,779 after 10 years and Rs 5,30,660 after 20 years.

You have to break down your expenses in terms of components and estimate which are the heads that would remain similar 10 or 20 years down the line, apart from inflation, which ones may move up (like medical) and which ones may come down (like eating out). On the estimated expenses, you inflate it for the number of years to retirement.

Estimation of corpus required

This is a function of multiple variables and assumptions. This is best done by a professional financial planner or adviser as per your requirements. Here we will give an outline so that you get an idea.

You have arrived at an estimate of the expenses per month post retirement. Then the variables are number of years left i.e. your life span, where you would invest your corpus, how much your portfolio would yield, and inflation. For the sake of illustration, let us say you would retire at age 60 and will live till 80 i.e. 20 years to go after retirement. The investment of your corpus for those 20 years would yield a return of 10 percent per year. Inflation is assumed at 5 percent per year. As per formula, net of inflation, your kitty will earn 4.76 percent per year. Your expenses per month, at that stage of life, are Rs 3 lakh per month. You do not want to leave any legacy out of this amount i.e. it may become nil at the end of those 20 years.

Estimation of corpus is, the amount that would give you Rs 3 lakh per month, for 20 years, when the amount invested earns 4.76 percent per year. Under the assumptions, that quantum of money is Rs 4.8 crore. For a requirement of Rs 1 lakh per month during retired life, the amount is Rs 1.6 crore and for Rs 5 lakh per month, it is Rs 8 crore.

The required kitty

Conclusion
Taking inputs from your environment is good, it broadens your horizon and gives you perspectives. However, you have to figure out what works for you. Otherwise, you would get lost in the multiplicity of views and opinions. To use an analogy, if you want to loose weight, you will get a plethora of advices and videos on social media. Those may be correct in their own way. Somebody would advice running, somebody would advice walking or dieting or something else. May be they got their results that way. However, you have to figure our what suits your conditions. Similarly, the expenses you incur currently and expect to incur in your golden years, is unique to you. There is no need to get swayed by opinions.

Article originally published in the Outlook Money.

Author: Mr. Joydeep Sen, Corporate Trainer, Columnist