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5 Factors to Decide Retirement Corpus

There are some factors that affect the retirement corpus and help make decisions to have the corpus required at the time of retirement. These are as follows:-

1] Current Monthly Expenses –

Think about what you will be spending money on during retirement. Consider what you want to do with your money during retirement. Estimate the costs related to travel, housing, food, transportation and more. You can use your expenses now as a guide for what you will pay later. If you plan to have your debt paid off, your expenses might be smaller than what you pay now. Downsizing your home and your lifestyle can also limit your expenses.

2] Inflation –

Rise in prices has to be factored in while planning for retirement. There are many unavoidable factors that can threaten your retirement corpus, and inflation is a primary concern. As the prices of services and goods increase, salaries also increase to stay level with inflation. For this reason, most people don’t notice the normal effects of inflation on their income and budget.

The big issue comes when you start to live off of your savings, and you don’t have an inflated income to keep you afloat. As you will not be earning post retirement and will have to spend from your corpus, this will be subject to inflation and impact your income. To stay ahead of inflation during retirement, it is critical to factor inflation into your retirement corpus.

Inflation Rates

3] Age of retirement –

There is no official age of retirement, but people (working class) generally retire around 60 years of life. Some people seek early retirement while others work as long as they are physically able to do so. Choosing the age of retirement and then calculating the number of working years left, will help decide the retirement corpus.

4] Life expectancy –

You can’t calculate your retirement corpus assuming that you will live forever. Thus, you will have to put a number to life expectancy that will give you an idea about the span of life post retirement. Improved healthcare is helping people live longer. But to calculate a corpus, you need to work with a fixed age.

In the image below, blue area depicts the ages lived healthily and the red area depicts unhealthy ages of life. And the area as a whole is the total life expectancy of a person in India.

healthy-life-expectancy-and-years-lived-with-disability INDIA.png

5] Rate of Returns –

This depends on your allocations to different asset classes such as equity, debt, gold and real estate. The higher the allocation to growth assets such as equity, the higher the expected returns. If most of your money is in debt instruments, you will have to assume slightly lower returns. Interest rates always play a role in financial planning.

Without a doubt, interest rates are going up. When interest rates go up, people tend to borrow less and this can have a negative impact on spending, which means stock prices typically fall. But, rising interest rates mean opportunity, too. If you know what you’re doing, you could pursue an earlier retirement than you originally planned by rearranging your investments.

Asset Classes - ROR
5 factors to decide retirement corpus

Why Retirement Planning?

Retirement Planning is a process whereby you will have a road map of your personal and financial life, which will help you to meet all your life’s expenses post retirement.

Hence, Financial Planning is a comprehensive term which includes retirement planning.

Following are some of the main reasons why retirement planning is important:-

Longer Life Span –

The life expectancy of humans is consistently increasing across the world thanks to technological advancement in medical sciences. In India too, the average life expectancy of an adult of age 60 has extended to almost 78. That means 18-20 years post the working years (depending on when you retire).

No Fixed Returns –

The returns on the investments may not be fixed always. Over a period of time they may go down. So this will affect the total corpus at the end of investment. The amount of funds left with you during your retirement may go down, as the returns decreased. Therefore, this needs to be taken into account while planning for retirement.

Falling Interest Rates –

india interest rates

Similarly as no fixed returns, the interest rates too may fall in the future. The interest you receive on your investments will get reduced. Falling interest rates will result in the reduction of final retirement corpus required and expected. Hence, falling interest rates should be accounted for while retirement planning.

Rising Medical Expenses –

With increasing age come more health problems. Medical expenses which may make a huge dent in your income post retirement. Failure here could lead you to liquidate (sell) your assets in order to meet such expenses. Remember medical claims do not always suffice.

Medi-claim or health insurance policies sometimes may not cover all your medical expenses. Therefore, your retirement corpus must be large enough to cover your and your family’s medical expenditure to avoid a financial crunch in the later years of life.

Hospital-Costs-in-India

Increased Standard of Living –

Standard of living is the way of living your life, how you are living right now and how you want to live in your retirement years. These could be travelling and exploring new places or taking up hobbies that you have always wanted to pursue.

However, if you do not plan and save for all these living habits in your working life, they cannot be continued in your post retirement years.

Hence, it is absolutely essential to have a strong Retirement Plan that will give you awareness on where you stand today, and what steps you need to take to maintain and increase your standard of living.

Early Retirement –

You never know what will happen. Your retirement may either be postponed or preponed. If it gets postponed, it is not a problem because you are still getting income. But your retirement could also get preponed, voluntarily or because of some reason. In this case, you haven’t planned for these extra years. Thus, retirement planning should also take this into consideration.

Inflation –

This is the main and biggest reason for retirement planning. Inflation refers to the rise in the prices of goods and services. It has the power to kill the value of your money. There has been constant rise in price of goods and services and it will continue to be on a rise until you reach the retirement age.

This means that you would have to pay more for everything in the future. From grocery to travel to accommodation, it is all going to cost you relatively more in the future. As you need to worry about it you need to account for it as well. You need to take into account inflation while calculating your retirement funds as well as your expenses.

yearly-inflation-last-10-years
Retirement Planning

Why do you need Retirement Corpus

Retirement is a new way of life in many ways. Apart from adjusting your work life, you also need to adjust your financial life to the new reality and that’s why Retirement Planning is critical. Here’s what you need to do to build your retirement corpus, if your current monthly expenses are Rs.75000/-, and you expect to retire in the next 30 years.

Why do I need Retirement Corpus or Retirement Planning
How to calculate Retirement Corpus

If you consider the rate of inflation at 8.0% p.a., you will need to build a retirement kitty of Rs. 15,30,06,036/- to live comfortably.

You will need to invest a lump sum of Rs. 87,68,554 or invest Rs. 67,687 each month, at an annual return of 10.0%, in order to enjoy your golden years.


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