Retirement Planning

The buzz word in the IT industry is early retirement. Most of the friends I know either want to move from IT to some other field or retire early. Do they have any plan? Is it possible to retire early? There is no way to retire early without planning early.  With proper planning you can either achieve the goal or quit your early retirement ideas and plan for a proper retirement. Remember retirement can be saddest or happiest day of your life depending upon the on of cash in hand.

I will walk through a common scenario where one wants to retire at an usual age with proper cushion in place to maintain his life style post retirement. 

Determine Retirement Age

The most important factor in retirement planning is to determine when one wants to quit. The basic rules are

• After you pay all your debts. It make sense not to think about retirement when you are paying EMI right?
• After all your long term goals are met (Children's Education/Marriage). You should not think about using your retirement corpus to finance your kids marriage/education. Even giving interest free loan out of your corpus will have a huge impact at later stage.

Determining Post retirement years

This one is tricky. You need to determine your post retirement years. Because post retirement, your corpus will not be linear it is actually a bell curve : meaning: your corpus post retirement will increase gradually initially and starts decreasing till it reaches zero. So if you outlive your expected date then you are left with no money.

This make us understand that like every financial goals you should always revisit and review your retirement plan once in a year throughout your life. We can say this retirement planning has two parts

• Corpus accumulation (While earning) and
• Corpus management (After retiring)

Corpus Accumulation

You need to calculate your monthly expense post retirement. You can take your current annual expense and remove all your EMIs, Children related expense and come up with a number which is comfortable for you to live, but don't plan to be too luxurious post retirement. 

Now arrive at the expense, post retirement, indexing the inflation using this calculator


Illustration:
Current Age : 30
Retirment Age: 60
Current Monthly Expense: 30,000
Inflation: 8%

This gives us R.s.3,01,879 per month post retirement which translates into R.s. 36,22,548 per year.

Now determine how long you will live, your post retirement Inflation and post retirement returns.


Post Retirement Years: 25
Expected Returns : 9% (Be conservative post retirement)
Expected Inflation: 8%

Step 1:

Use this calculator and enter the values.

This shows that Rs.80,818,339 is needed as a corpus while retiring. Does it sound impossible? Let us see

Step 2:

Use this calculator  and enter the values

1. Current savings balance is 80818339 that we get from the above calculator
2. Proposed monthly withdrawal amount is  301879 which we calculated in illustration
3. Annual withdrawal increase is the inflation

this calculator will also gives you the yearly split up of your beginning balance, withdrawals and ending balance.

How much do we need to save?

After arriving at a value of Rs.80,818,339 as a corpus we can use this calculator to determine how much money do we need to invest now to achieve that corpus

This shows that we need to save Rs.1,15,358 annualy or 10000 per month (easy man) and increase it by 10% every year to achieve the corpus. which is very much possible


Note: Like every goals there are variety of assumptions we took while doing the calculation like interest rate and inflation. So it is essential to review it once in a year and adjust your investments. Health cost is a different issue post retirement so consider it while calculating future expense.

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