Retirement Planning and Simple Retirement Calculator in Excel

In the last 8 years as a financial planner, I have seen retirement of many clients.  Some of them are lucky to receive good amount as PF, Gratuity and an inflation linked pension. They live a decent life in retirement. On the other hand, there are many who don’t have much in PF & gratuity and no pension at all. They are facing financial issues in retired life.  With more and more new generation employees working for private sector without a pension and frequent job changes, they fall in the second category.

Retirement planning for new generation

Working upto age 60 is an illusion now with huge work pressure & health issues. Employers prefer to replace aged people with young blood with new skill set. New gen prefers to retire early.  For them retirement is an escape from the routine job and doing what they wish and spend time on travel etc which they couldn’t enjoy during the working years.

The issues that a new gen retiree will face are.

1. Planned/ forced early retirement which leads to a long retired life, may be 30-35 years.
2. Expenses will not come down on retirement. This is because you want to leave an active life even after retirement. Expenses on travel, social life etc can be more after retirement.
3. Options for quality health care are coming with a high cost, increasing at a faster pace. Health care issues are increasing daily.
4. Longevity is increasing. I am assuming 85 for my calculations, but be ready for even 90.
5. Real life inflation rates are higher than the figures declared by authorities.
6. We can’t depend on our children for our retired life. They can be in some other country.
7. Accumulation in PF is very less, due to withdrawal during job changes. No gratuity. No pension in private sector. NPS will not offer payment like the inflation linked pension.
8. Interest rates are coming down. We can’t depend on bank interest.

New gen can plan his retirement carefully during his active life. With high salaries and many investment options, they can plan. We need not sacrifice our present life in worrying about future but at the same time we should not live as if there is no tomorrow. Keep a balance to have a better today & tomorrow.

Steps in Retirement Planning

1. First step in retirement planning is to decide the amount you want to provide per month for the retired life. This depends on your life style, location etc. While some expenses like kid’s education will not be there during retired life, other expenses like health care costs will step in during retired life. If you are spending 40,000 per month today, you may need almost the same amount for retired life also.
2. Lets now calculate Retirement requirement based on certain assumptions.

Assumptions:

Current age – 35, Retirement age – 55, Life expectancy- 85 years. Post retirement investment Return – 1% above inflation. Current monthly household expenses – 40,000. Spouse age -35.

Monthly Expenses to be provided after retirement in current value – Rs. 40000/pm

Value of Rs. 40000/- at 6 % inflation after 20 Years-Rs. 1.28 Lakhs/- pm

Amount required at age 55 to ensure inflation adjusted monthly withdrawal of 1.28 Lakhs till age 85 – Rs. 4 Cr.

In simple terms, you should have 4 Crores at age 55 to manage the same standard of living till age 85. At age 85, the 4 Crores will become NIL.

If you are living beyond 85, think about options like reverse mortgage. You can pledge your house to a financial institution and they will pay you a monthly amount. You can stay in the house as long as either of you are alive.  You need not pay any interest during your life time. After that, the financial institution will get back their money either from your legal heirs or by selling the house.

How to create 4 Crores in 20 years?

First step in this is to calculate the likely provident fund accumulation at age 55. You can do this after considering the present PF accumulation, monthly contribution from your side & employer’s contribution. You can assume a conservative annual increase in PF contribution based on your past experience & assume a conservative interest rate for PF in future. Also consider likely gratuity/ NPS at retirement, if you are eligible for these.

Let’s assume that you will get 1 Crore from PF/Gratuity/NPS at age 55. In this case, you have to plan for the balance 3 Crores in 20 years.

It is a known fact that we cannot invest entire amount in one product. We should plan it depending on the age, risk appetite, term to retire etc. At young age, you can have a good exposure to equity either through stocks or through mutual funds. It is better to adopt the mutual fund route to spread the risk and avail the benefit of professional fund management. You can have a mix of diversified equity funds, PPF, EPF, Postal Schemes and bank deposits in various combinations depending on your age. This is called asset allocation. We have to adjust the allocation if required, after review atleast once in a year. This is called rebalancing. We can have more allocation to equity at younger age and more towards debt, as you near retirement. Deciding the correct asset allocation and rebalancing it periodically will help you in reaching your goals easily.

Let’s assume that you invest 1.5 Lakhs in PPF every year. Assuming a 6% return for the next 20 years, it will create around 55 Lakhs at age 55.  Now, the shortage to be planned is 245 Lakhs.

This can be planned through the mutual fund route with gradual rebalancing.  Equity funds can give a return of 12% in the long term and debt funds can give around 6%.  Let’s assume the portfolio can generate a CAGR of 10% in the next 20 years due to gradual rebalancing.

You may have to invest 33,000 per month in a mix of equity & debt mutual funds to create 245 lakhs in 20 years.

Click on the below Link to download Retirement Calculator in Excel

Simple-Retirement-Calculator-for-Retirement-Planning

Avoid toxic products- Keep it simple

If you look at the available financial products in the markets, most of them are not good/suitable for you. Many investors cannot invest in direct equity because it requires regular monitoring and stock picking skills. Traditional life insurance is not good for you because of the poor return it offers. Unit Linked Insurance Policies (ULIPs) are also not good because of the different types of charges deducted from the fund value. Bank deposits are safe & simple but the return is less and is taxable. Real estate as an investment is losing the charm because of the high prices/ affordability/ low liquidity/limited scope for appreciation.  Gold is also losing out because of less demand in gold by the new gen.

For a common man, Employees Provident Fund (EPF), PPF and couple of Equity & Debt mutual funds can help him in creating a well diversified portfolio for retirement.

How to ensure regular monthly income after retirement?

This depends on the financial products available at the time of your retirement and the tax rules at that time. In the current situation, you can consider Senior Citizen Savings scheme (SCSS), Prime Ministers Vaya Vandana Yojana (PMYYJ), Post office Monthly income scheme (POMIS) etc to get a regular income. But income from all these are taxable.

Public Provident Fund (PPF) can be continued even after retirement and this can be used to ensure annual tax free withdrawal.

The other option is the Systematic Withdrawal Plan (SWP) from the debt mutual funds.  This is more tax efficient and can ensure a fixed amount as per your monthly requirements.

Enjoy your golden years

If you plan carefully during your working years, the golden years can be beautiful and rewarding. Try to balance the present life to ensure good future.

Also ensure that you develop good habits like regular exercise to ensure a healthy retired life. After all health is wealth.