Few days back, we posted an article on things you should do to retire early and we received many emails from our readers to help them on retirement planning. There were lot of questions posted by readers on how much they should save for their retirement, where to invest for their retirement, will the money they save now beat the inflation 20-30 years from now, can they lead the same lifestyle even after retirement? I am writing this article addressing the above questions. I hope this article will help you to do retirement planning yourself even if you are from a non-financial background.
Step 1: When do you want to retire?
Though most people retire at 58 to 60 years in India, if you are reading this article, you are most likely younger and want to retire early. Professionals working in hectic work environment like software industry generally tend to think about early retirement. If you want to retire early, you need to plan at least 10 to 12 years prior to your retirement. For example, if you are planning to retire at 42, I would recommend you to plan your retirement in early thirties.
Step 2: Calculate your Current Yearly Expenses
If you already have a habit of tracking your expenses, you should be having this information in hand. If you do not track your expenses, start reviewing your bank statement and credit card statements of past 6 months. Make a note of all the major expenses like your rent, travel/commute, living, medical expenses, children’s education expenses and any other house hold expenses. Add at least another Rs 50,000 to Rs 1,00,000 per year as an unplanned expense based on your current salary and spending pattern. If you are expecting to pre-close or complete your home loan before your retirement, exclude the rent or EMI that you may not be paying after retirement.
For example, this is how you would calculate your expenses,
Rent or EMI – Rs 25,000
Commute – Rs 5,000
Food & Dining out – Rs 10,000
Investment – Rs 5,000
Medical Expenses – Rs 2,000
Miscellaneous & Unplanned – Rs 5,000
Total Monthly Expenses – Rs 52,000
Total Yearly Expenses – Rs 52,000 X 12 (months) = Rs 6,24,000
Let’s say I will be repaying my home loan in another 5 years and I am planning to retire 12 years from now, I will be eliminating my EMI from my monthly expenses.
My updated monthly expense will be Rs 52,000 – Rs 25,000 (EMI) = Rs 27,000.
Let’s say I am also planning to stop investing after retirement, I will remove my investment quotient of Rs 5,000 from my monthly expenses.
Final updated monthly expense will be Rs 27,000 – Rs 5,000 = Rs 22,000
Final Year Expenses = Rs 22,000 X 12 (months) = Rs 2,64,000
If I am planning to maintain the same quality of even living after retirement, Rs 2,64,000 + Inflation % is sufficient for me for a good life!
Step 3: Calculate how much you would require after retirement
The value of a rupee does not stay the same. The value of a rupee is observed in terms of tangible things it can buy. When inflation goes up, there is a decline in what you can purchase with rupee. For example, if a kilogram of apple costs you Rs 100 and if the inflation rate is 7% annually, then one kg of apple will cost Rs 107 in a year.
We haven’t applied inflation in the calculation we did in Step 2. Based on the historical data of inflation in India for the past 30 years, it’s safe to assume that we may continue to have ~7% inflation. If you compare with the inflation rate in other parts of the world, it would be roughly 4%.
Now let’s say you want to retire after 12 years, total year expenses after retirement would be
Total Yearly Retirement Expenses = (Final Current Yearly Expenses) X (1 + Inflation % ) ^ (Number of Years left for Retirement)
Total Yearly Retirement Expenses = (Rs 2,64,000) X (1 + 0.07) ^ 12
Total Yearly Retirement Expenses = Rs 5,94,578 = ~Rs 6,00,000
Step 4: Savings plan for the retirement Corpus needed
Now we need to have a yearly income of roughly Rs 6,00,000 per year during our retirement. Since we are planning for retirement after 12 years, I am assuming a safe return of 15% per year as the investment period is long term.
Retirement Corpus Needed = (Yearly Income needed during Retirement) / % of Return from your investment
Retirement Corpus Needed = ( Rs 6,00,000) / 0.15 = Rs 40,00,000 = Rs 40 Lakhs
If I want to have a retirement corpus of Rs 40,00,000, we need to invest X amount every month with a return of 15% per year for another 12 years.
To calculate the monthly investment I need to make, use the below formula
X (Savings per Year Required) = (Retirement Corpus Needed) / ((1 + Return % ) x (( 1 + Return %) ^ Number of years ) – 1)/Return %
X (Savings per Year Required) = (Rs 40,00,000) / ((1 + 15 %) x (( 1 + 15 %) ^ 12 years – 1) / 15 %
X (Savings per Year Required) =(4000000)/((1.15)*((1.15)^12-1)/0.15)
Savings per year Required = Rs 1,19,933
You need to invest approximately Rs 10,000 a month!
If you can’t invest Rs 10,000 a month, try cutting down the entertainment or other unnecessary expenses. I always believe in not being too stingy, instead explore the opportunities and increase your income. You can look at taking a part-time job or increasing your salary by looking for a job change or a career progress by learning new technologies.
If you are looking for higher returns for the investment, you can consider SIP, ETFs, sectoral mutual fund, equities or a combination of all these asset class. If you need help on this, contact us or leave your questions on comments section.
Step 5: A final note on retiring Happily
Retirement planning is not that difficult if you understand and follow the above steps. Choosing the right investment products in the market that will yield the best CAGR is the key to retiring early.
Life is not promised to us. You never know what may happen later! Most of the times, we are completely consumed by our goals and spend little time with our loved ones. Remember one thing – retirement is not the beginning of your life. Only this moment is true, so live and enjoy the present!
But consciously work towards your retirement goal! Happy Retiring!