Everyone has a dream, but there is one dream common for everyone — a peaceful retired life! While setting a financial goal — the most critical one is a long term goal of retirement planning. Especially considering the uncertainties in terms of career growth and stability, retirement planning becomes more imperative. It also becomes crucial as risk taking capabilities tend to be different as one approaches retirement age. Considering factors like the fast changing world, changing technology and the most important factor called inflation — everyone is very puzzled about what would be a good corpus required to have a peaceful retired life. So, how to find a precise corpus for retirement by investing in mutual funds?
If considered on financial aspects, relatively two long phases in our life are — accumulation and distribution. Accumulation phase is the earning years of a person’s life, when a person accumulates savings. Distribution phase is the retirement years, when some of the savings will fund the living expenses. While the accumulation phase has a benefit of certainties (income, age profile and even the risk taking capabilities), the distribution phase has got many uncertainties. Though finding an exact amount for retirement corpus seems to be a complex phenomenon, it becomes simple when we try to answer a few questions. Rather, when you do any retirement calculations, you make some assumptions and you get an answer.
Amount Required Every Month of retired Life
Considering today’s lifestyles, expenses are going to be there even after retirement. Just with little changes over here and there. To decide a retirement corpus — one has to calculate the expected monthly expenditure after the retirement — where inflation plays its part. Things are going to cost you more compared to what it costs today. Inflation varies from year to year, however, one can take a single rate of inflation as the time frame is longer. Without making it complex. A simple excel sheet formula is used to take out the exact figure of monthly expenses required after retirement based on the current monthly expenses. Just to put it in numbers — considering expenses of Rs.10,000, with an inflation rate of 7 per cent would be Rs.54,275 after 25 years. So, one must create a corpus that can generate this much income at a risk free rate.
While we have considered inflation based expenditure, one also needs to consider income to be generated (based on the rate of returns) from the corpus one has built. So, on one hand, the inflation would make its impact and the invested corpus would generate some returns. On the other, one has to consider the discounted return considering both the factors. In simple terms generate higher returns than the inflation taking lower or moderate risk.
Number of years to retirement
Number of years to retirement plays a vital role here. While setting a financial goal, the longer the period of holding (based on consistent compounded annual growth rate {CAGR}) better the returns are. To generate consistent monthly returns — one must create a corpus till his retirement age. How does one calculate that?
Let us take an instance here. A is 30 years old today and A’s targeted retirement age is 58, then retirement is 28 years away. This time varies from person to person. Many would like to take their career till the last day, while others retire early. And a lot depends on that. Just to put it in numbers — in the example below (Table — Retirement Corpus Calculation) the number of years to retirement is 28 years. Based on that, the monthly savings required are Rs.43,996. However, if the same is reduced to 25 years the monthly amount of savings required would be Rs.49,010 or if it is increased to 30 years the monthly savings required would be Rs.41,097.
Here, there are two factors — one is time frame and the other is higher rate of return. Historically, it is time which plays an important role in wealth creation (especially in mutual funds). Higher rate of return would mean higher risk to be taken. Naturally the investment instrument to be chosen (equity, mutual funds or any other alternative asset class) depends on different risk taking capabilities. Further, investment vehicles chosen after retirement also stand to be a crucial decision. Usually it is set at the risk free instrument rate, however, it is not possible to beat the inflation rate. Thus, it is always advised to consider a balanced portfolio of mutual funds schemes.
Number of retirement years to provide for
The next factor is, the number of retirement years to provide for. Longer the duration of such a period, the larger the corpus is. A basic concept suggests that retirement should plan for the life-time of both partners. Further a longer period in case of concerns regarding earning potential of the next generation. One must understand that with medical technology changing for better, the rising life expectancy of people needs to be factored. The following table explicitly showcases the kind of calculations required to arrive at a right figure. Apart from inflation there are other factors as well. The table shows how one has to calculate the corpus to be created to generate Rs.40,000 expenses for retirement.
Selecting right instrument to invest
While we reiterate this time and again that starting early is important, selecting the right instrument is also the key! In the above example, we have considered 10 per cent CAGR as returns while creating the corpus. We’re sure that there are many mutual funds that may give more than 10 per cent. However, the moot question is — does that align with the overall financial planning or suit one’s risk taking capability?
Today, there are enough options for mutual fund schemes providing retirement plans with expert advice. The rest only depends on one’s financial goals. Whether one wants to build a corpus from equity (providing comparatively higher returns over a longer period) in a lesser time period or wants to go for a consistent mutual funds scheme where experts take care of your portfolio. One’s portfolio should be a balance among income generation, capital protection and growth schemes of mutual funds. Taxation also plays its part while calculating the corpus to be created and returns it can generate. However, taxation norms in case of retired people are comparatively lenient and hence won’t make a much of impact in the longer run.
Conclusion: While there is no thumb rule as such for what would be an exact corpus required to have a peaceful retired life, calculating the expenses adjusted to inflation will make it easier to come out with a ballpark figure. There are figures like 30x or 40x of annual expenditure to be taken as a good retirement corpus. As mentioned earlier, it primarily depends on the kind of expenses you have today and will have in the future. There are financial calculators helping one to arrive at a figure. However, the best way to arrive at a right corpus figure is — calculating expenses adjusted to inflation and then selecting the right instrument and that too as early as possible.
Pro Tip: Corpus to be built for retirement depends on different assumptions like expected inflation rate, tenure of retired life and the investment vehicle selected. Start early, select the right investment instrument and a longer duration of the goal will take care of the rest.
