Retirement Corpus – One day, Ramesh and Suresh were sitting together and talking about their retirement planning. Ramesh explains that “sooner we will retire, the longer will be our retirement life.” Suresh laughed and replied, we are in a job and cannot retire early. Also, if we retire early, then we need a bigger retirement corpus that will be required to support us in our post-retirement life. Suresh added more, for a bigger retirement corpus, we have lesser time for early retirement.
Ramesh thinks a bit and agrees with whatever Suresh said.
Ramesh added the saving for retirement is one of the most important financial goals. So, he already started saving for their retirement along with their Step-up SIP investments.
Suresh said to Ramesh, “the concept you taught me about step-up investment is a wonderful concept.” And I can see my corpus available after 20-25 years. Suresh continued and said, “I request you now to please help me, How I can build my retirement corpus. Or should I keep my step-up investment as my retirement corpus?”
Ramesh replied, you keep your step-up investment as your retirement corpus. But what you will do at the time of your kids’ education or your kids’ marriage, or any other major emergencies in your life. In my opinion, you must plan your retirement in a different way. And do not merge your retirement corpus with your different financial milestones.
Suresh eagerly said, please teach me about Retirement planning. How much I need for my retirement? How can I start to build my retirement corpus?
WHAT IS RETIREMENT PLANNING?
Ramesh can see the eagerness & the anxiety of Suresh. He explained that for retirement planning we must follow the three simple steps.
What are these 3-steps? Suresh asked.
Ramesh told me these 3-steps are the basis for building your retirement corpus and help in post-retirement life. I am also following these steps that are now helping me in building my retirement corpus.
The 1st step is we should know “what should be the size of the corpus?” That is the foremost and most principal step to building your retirement.
In your 2nd step, you must know “how to build the corpus.” In this, you must know how many monthly savings will be necessary to build the final retirement corpus. Experts say that just keeping savings is not enough for your retirement. Investing is the option that helps you to meet your targets.
The 3rd step is “how to generate retirement income.” In your post-retirement life, you must meet your expenses. And to meet your expenses, you need some fixed income. So, after retirement, your retirement corpus must generate some fixed income.
Ramesh further explains retirement planning that there are majorly two phases. i.e., Accumulation Phase & Distribution Phase.
In the accumulation phase, you save and invest money to build your retirement corpus. The early you start, the large corpus you can generate. The power of compounding plays its role. You also know the benefit of an early start. By starting early, your money gets a long time to play with compounding. Also, when you start late, you will get the lesser time and more money to invest for your retirement.
The distribution phase generally considers the post-retirement life. After retirement, there will not be any regular income for you. You will then live your life with your retirement corpus. At this point, you cannot take the risk to use your corpus unnecessarily. It is now important to utilize the funds more wisely. That can be achieved by investing your corpus in such a way that it generates consistent income for you.
HOW MUCH CORPUS IS NEEDED FOR YOUR RETIREMENT?
Ramesh further takes his example and explains to Suresh that how he gets to know how much corpus is required for his retirement.
Ramesh then said, he started investing in building retirement during the 6th year of his step-up investment. That is the time when Suresh converts his conventional SIP into step-up SIP Investment.
He further said; initially, I checked my current month’s total expenses that was ₹40k at that time. Then I figure out by when I will get retired. I was 30 years old 5-years back & I decided I will retire at the age of 60. So, I have 30 years for my retirement. Further, I adjusted the inflation rate with expenses. When I do calculations, I was amazed that after 30 years when retired, my monthly expenses would be around 2.29lacs per month. (See below calculations.)
That figure stunned me. I thought, is it possible that after retirement without my job can I take care of these expenses? But after seeing this figure, one question arises to my mind that “is it my expenses will be of this much amount?”.
My answer was “NO.”
When I get older and rich in experience, my actual expenses will get reduced automatically. So, I consider my expenses would be 50% at the time of retirement. That percentage is called the replacement ratio.
“Replacement ratio,” Suresh asked.
In retirement planning, the replacement ratio is a simple concept and is a very important factor. Generally, people get older, and their expenses are reduced because of their fewer desires. People tend to spend much less after retirement. So, if you have 100% expenses today after 30 years your expenses are <100%.
This ratio depends upon the people how much they want to spend on their lifestyle after retirement. So, in my case, I consider around 50% only.
Now, my total expenses would be like below:
Now, you know how much income is required to take care of your expenses.
Further, in the next step, you need to find your corpus that can generate this required income.
Suppose you invest your income that generates a 7% rate of return and inflation-adjusted around 5%. And your life expectancy would be around 20 years that means I consider I can live up to 80 years. 20 more years after my retirement. We only need to find future value as below:
After calculation, I get to know that I need 2.49Cr. or 2.5cr. the value that can generate my monthly income of approx. 1,14,870/-
After all, this Suresh was amazed and just seeing Ramesh continuously. His eyes getting bigger and sweat on his forehead, and asked Ramesh in a low voice.
“I am now 35years and if I consider I will retire at the age of 60, I only left 25years for my retirement. That means my accumulation phase is running & I have zero income for my retirement.”
Ramesh put his hand on his shoulder and said still you have 25 years in your hand & still, you can build your retirement corpus.
I give you my calculator (below) that will help you to know your retirement corpus in a quick time.