Understanding the Retirement Planning
There was once an Ant and a Grasshopper that lived in the hills station, where the winter was generally very severe with snowfall 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 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 grasshoppers, moving ahead unprepared for retirement, solely depending upon the employee provident fund accumulation, which 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.
Why Retirement Planing is Important?
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 into 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 next 25 years, factoring in inflation of 6% for the entire accumulation and distribution phase.
Scenario 2: Starting age – 40 years
If Rahul procrastinates and starts retirement planning at age 40, his monthly expenditure of Rs 50,000 per month in 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 gets caught up in chasing life’s other goals and neglects 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 what 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 the power of compounding, and build a large corpus by investing only a small sum. This statement truly illustrates the proverb, “Little drops make a mighty ocean”.
