Answer these 3 questions, before you plan out
your retirement corpus
Many people have a number in their heads
which makes up their dream corpus but rarely do they consider if this dream corpus
will actually allow them to maintain their lifestyle, years later.
If we were to ask you
whether you are saving for retirement or not, many of you are likely to say
yes. In our several years of meeting investors, everyone plans for saving
enough for retirement.
But if we were to ask
the same investors whether they can maintain the same lifestyle they now have
decades into the future, they start scratching their heads. Many people have a
number in their heads which makes up their dream corpus but rarely do they
consider if this dream corpus will actually allow them to maintain their
lifestyle, years later.
What people believe
about retirement
Most people around the
world want to work for up to 30 years and live a retirement that is generally
well over 30 years. Considering that lifespans are now going up well into the
90s, a retirement lasting for 40 years is likely to become the norm rather than
the exception. Paying for such a long retirement means working for more years,
just to be able to afford the retirement. The problem is that the vast majority
underestimate how much they will need to retire. Gone are the days when
reaching a crore in India meant you were ready to retire in style.
Answer these three
important questions, before you plan your retirement corpus.
1. Is the house that you live in paid for?
2. Are your total financial savings (apart from
your home you live in) equal to (or greater than) 25 times your current annual
expenses.
Only if you fulfil the
above stated requirements, can you consider yourself prepared for
retirement.
3. You also need the
courage and conviction to invest wisely to generate about 4%-5% above
inflation rate of return (if inflation is
5% now, your portfolio should generate nearly 10% to ensure you retirement is
covered).
How does the math
work?
Do you have sufficient
financial corpus built (plus you own the house that you live in) which can
cover your expenses for the rest of your retirement period.
As long as the total
corpus is 25 times your current annual expense and you have sufficient
conviction to invest in inflation beating assets, your current lifestyle is
broadly covered for.
For example, if the current
annual expense is Rs 10 lacs (not including home EMI, or rent) and you have a
corpus of Rs 2.5 Cr, the math works as follows.
·
If Rs 2.5 Cr is
invested in a portfolio which earns 10%, you make Rs 25 lacs that year. You
take out Rs 10 lacs, for your consumption needs. Allow the remaining Rs 15 lacs
to continue to grow the portfolio.
·
This way, in the next
year you can use Rs 10.5 lacs and this will keep increasing in line with
inflation. Remember, your expenses will double every 12 years.
The retirement corpus you plan for should generate an income
which keeps growing in line with inflation.
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