Understanding retirement planning?
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Consistent small investments to fund a big retirement corpus

There was once an Ant and a Grasshopper lived in the hills station, where the winter was generally very severe with snow-fall almost round the season. The Ant worked very hard to collect foods that would last the entire season, without having to venture out during the harsh winter season. The grasshopper was a happy-go-lucky fellow, playing all day around. It thought the ant was boring and did not enjoy life; it made fun of the Ant. The Ant on the other hand would always advise the grasshopper to prepare for the harsh winter season, and not fool around the whole day.

Finally, winter arrived and as expected it was very harsh. The entire area was engulfed with snow, there was hardly any surface visible and no sight of any food. The grasshopper despite the desperate hunt could not find any food; while the ant family tucked in the hole were well prepared to face the harsh winter. The grasshopper then went to the ant, asking for food. The ant had limited excess but was kind enough to help with some food that would at least help the grasshopper survive the winter. The grasshopper learned his lesson.

Most of us wish to have an independent & self-reliant retired life (we wish to become “Atmnirbhar”) and many aspire to have an early retirement.

Yet, the reality is absolutely the opposite. The HSBC survey reveals that 7 out of 10 people will have to depend upon their children to help them in their retirement years; much to their dislike and very much against their self-esteem. Unfortunately most behave like the grasshopper, moving ahead unprepared for retirement, solely depending upon the employee provident fund accumulation, that may or may not be sufficient to fund the every-rising lifestyle inflation.

Why does this happen?

There are three key reasons why they land up in this situation.

1. Goals that are far & distant away are often ignored/procrastinated.
2. Most often caught between fulfilling instant goals vs. far-away goals. Most often people’s preference for instant gratification beats the choice of delayed gratification.
3. Anything that people cannot ascertain or correctly estimate gets ignored.

How & why is it important to plan for retirement now?

Before I lay down the simple steps to easy retirement planning, let me first explain what is retirement planning?
Retirement Planning is all about estimating the amount of money needed to live a comfortable retired life, based on the current lifestyle & factoring inflation to current monthly expenditures. The planning involves how to accumulate wealth and consume over the post-retired life until the last breath.

Let us understand how can we easily accumulate a large corpus, and what’s the most important factor to easily fund a huge retirement corpus. To convey the most important point, let me share it via three different scenarios.

Scenario 1: Starting age – 30 years

Rahul starts his retirement plan at age 30 when his monthly expenditure is just Rs 50,000 per month. Based on his current expenditure, the desired retirement corpus is estimated at Rs 6.88 Crores. To accumulate this retirement kitty, he just needs to invest Rs. 22,354 per month over the next 30 years; thereby investing Rs 80. 47 Lacs. The accumulated retirement corpus will be consumed over the period of next 25 years, factoring inflation of 6% for the entire accumulation and distribution phase.

Scenario 2: Starting age – 40 years

If Rahul procrastinates and starts the retirement planning at age 40, his monthly expenditure of Rs 50,000 per month in the span of 10 years, will inflate and now it will be Rs. 89,542 per month. To fund the same retirement corpus of Rs 6.88 Crores, he will need a monthly investment of Rs 74,875 per month; thereby an investment of almost Rs 1.80 Crores.

The cost of procrastination by 10 years is almost an additional investment of Rs 1 Crore.

Scenario 3: Starting age – 50 years

Suppose Rahul get caught in chasing life’s other goals and neglects the retirement planning. By now the monthly expenditures have inflated to become almost Rs 1.60 Lacs per month. Now to fund the same retirement corpus of Rs 6.88 Crores, he will need a monthly investment of Rs 3.07 Lacs per month; adding to a total principal investment of approximately Rs. 3.69 Crores. This is how your accumulation & distribution curve would look like.

Procrastinating not only costs an additional Rs 2 Crores investment but many would find investing Rs 3.07 Lacs per month very difficult.
No wonder 7 out of 10 people depend upon their children.

Conclusion:

Retirement is the only certain goal that starts from the day we start earning. You will always have choices in life to make. It makes a lot of sense to start early, reap the benefit of power of compounding and build a large corpus by investing only a small sum. This statement truly illustrates the proverb, “Little drops makes a mighty ocean”.

Authored by:
Tanwir Alam – Founder & CEO, FINCART

The next articles on retirement planning to follow:

1. How to invest to build your retirement corpus?
2. How can the retired invest so that their money beats inflation and lasts a lifetime?

Disclaimer:

The accumulation and distribution phases are not linear in real-life. The graph and scenarios have been depicted in a linear manner to convey the message with simplicity. The assumption used are inflation – 6%; pre-retirement returns – 12% p.a. and post-retirement returns – 8% p.a.

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