My Life, My Decisions

Retirement:

This time comes in every one’s life so one has to accept it. Only thing one has to keep in mind particularly during his peek days to plan
for this eventuality. You still need to do one crucial task: deploy your retirement corpus in a way it can sustain your expenses for the rest of
your life. A study has revealed that at 60, the average Indian can expect to live up to 78. In urban areas, the average lifespan is even longer.
By the time one is 70, the average life expectancy goes up to 82 years. This also means retirees have to plan their finances in a way that they
don't run out of money in their old age.

6 Steps of doing Retirement Planning:

There are some important points mentioned below , that must be kept in mind for retirement planning.Apart from these, your own experience and the lifestyle you had are also important to keep in mind.

- How much is your Current Yearly Expenses
- How much will be average Inflation figure for the coming years
- How much would you need on your Retirement
- Finally coming up with the corpus you would need at the retirement
- Calculating how much you should save per month
- Understanding where to invest the money

Step 1: Calculating your Current Yearly Expenses

Expenses - like Rent, House hold expenses, Children fees etc etc. You should have a rough idea of what is the minimum amount you require per month for living a good life. You should also try to save a part of your salary every month, Ask your self, Can you live with 70%, 80% or 90% of your present Salary?

Example:

- Mr A calculates his expenses:
- Rent – Rs 10,000
- House hold expenses – Rs 11,000
- Medical Expenses : 1,000
- Entertainment and outing : Rs 3,000
- Total Monthly Expenses : Rs 25,000
- Yearly living Expenses : Rs 3,00,000 (12 * 25,000)
- Other Expenses like Vacations and Surprise Expenses : Rs 50,000
#### Total Yearly Expenses : Rs 3,50,000

Step 2 : Understanding how much Inflation would be there in coming years

Step 3 : How much amount would you require in your Retirement (This is purely individual's choice). Continuing with same example

Retirement yearly Expenses = Current Yearly Expenses * (1 + inflation)^(number of years left)

Mr A has already calculated his yearly expenses as Rs 3,50,000. He has 28 more years at hand .

He calculates his retirement yearly expenses
Retirement Expenses = 3,50,000 * (1+ .065)^28
= 20,40,000 (20.4 lacs approx)

Step 4 : Finally coming up with the corpus you would need at the retirement

So suppose you expect to get a return of 7% per year. Then you need X amount at the end where 7% of X is = your yearly expenses. Corpus needed = (Monthly Expenses)/(interest expected )

So in the case of Mr A, the yearly expenses expected was Rs 20,40,000 and return expected is 7%. So we calculated the amount required for Retirement that is 20,40,000 / .07 = 2,91,00,000 (2.91 crores).

Formula used for calculation

PVA = A * [ {(1+r)^n -1} / { r * (1+r)^n } ] , Where

- PVA = Present value of Annuity (Amount you need to have at your retirement)
- r= Rate of interest you expect to get
- n = Number of years you want the Yearly Income.

Step 5: Calculating how much you should save per month

Here comes the interesting part, here there are two things

- How much Return you expect to earn in long term
- How much you can afford to invest per month

So here is the process

- You figure out how much you can save
- Then you find out how much return you need to generate
- Then you decide where to invest to generate that return

You can also go the other way deciding how much return you can generate and based on that how much you need to save. But I prefer the first way because then you control things in your hand but you can go the other way too. So our friend Ajay has a saving of Rs 15,000 at the moment (40,000 – 25,000) And he thinks that he can easily invest 10,000 per month at least over a long term. So the return he needs to generate per year CAGR for 28 yrs to generate his retirement corpus of 2,91,000,00 comes out to be 12.25%, see the calculator mentioned above.

Step 6 : Understanding Where to invest it

So you got the CAGR return number which you need to generate over a long term. This number will decide how much risk
can you take and where can you invest depending on your time frame. See below to understand which are the suitable products
you can invest to get your returns.

Understand the ground Rules:

- Higher the return expected, higher the risk you need to take
- More the Tenure, Lower the risk
- Direct Stocks, Sectoral Mutual Funds, Equity Diversified Mutual Funds
- Equity Diversified Mutual funds, Balanced Funds
- Mix of Balanced Funds Debt Funds
- FDs, PPF, Debt Funds, Balanced Funds [ find out which FD is best ]

However, if the tenure is more than 10 yrs you should always go for Equity Funds. Never go for FDs or Debt funds if your tenure
is long enough. Understand the Chemistry of Equity and Debt please.

So in our Example of Mr A, he requires a return of 12.3% CAGR in 28 yrs, so for this, he can invest in Equity Mutual funds
through SIP he has different ways to achieve this like Doing a SIP in 3 Equity mutual funds OR combination of PPF (25%) and SIP
in mutual funds (75%) OR Direct Equity (5-10%) + PPF + Some Balanced Funds. You got to be creative in this :), there are endless
ways of doing it.

Conclusion :

Here you go!!, you just did your Retirement Planning :).

You can do your retirement planning yourself easily. A financial planner will look into more details and will do perfect planning for you which would be best but this is pretty much great way you can adopt your self. Involve yourself in this journey of Financial planning and you will be amazed to find how much Fun it is.

You may revisit the presentation (Future Value) given in the Saving page.

Want to check Post-Retirement Planning/Saving options Click to See