Of all the financial goals that we plan for in life - be it planning our children`s education, purchase of our house, a vacation, or buying a car - retirement remains a distant dream and also the one which occurs last on our priority list so we either avoid planning for it or push it to the next time. So people always wonder what would be a good time to start planning for it.
Only when we look at the numbers required in terms of money for retirement, one realizes that it could be a tad bit late or that it should have been done before. Sometimes people even drop the retirement planning by saying that they probably missed the train.
So what is the right time for retirement planning, we believe that any time between the ages of 25 to 35 is a good time to plan for retirement, but this does not mean that one should not plan for retirement after the age of 35. The sooner you start the better you can plan.
Let`s take an example of retirement planning at three different stage of life.
Chinmay is 25 year old professional. He works with an MNC for last 3 years. He decided to retire at the age of 60 years. Based on that, he calculated his monthly expenses and came up with a pension requirement of Rs 30,000 a month as of today. After doing analysis, he comes to know that inflation is a biggest enemy for his retirement; the expenses of Rs 30,000 today will certainly not remain the same after 35 years. Hence, it becomes pertinent to accommodate inflation as well to arrive at the corpus required for retirement, the investment pattern required to achieve the set corpus would entirely depend on when he chooses to start investing.
Below table shows the calculation for the retirement planning for different age group people.
House hold budget: - Rs 30000 a month
Year of retirement -60 years
Inflation Rate: - 6% p.a.
Expected Returns: - 12% p.a.
Considering, a large part of today`s expenses would not be there once one retires (EMIs, lifestyle expenses, hopefully even your investment commitments) and since most of the goals including owning a home, a car and children`s education would be taken care of; we assume that the only expenses that remain would be those pertaining to running household such as grocery, utility charges, adhoc expenses etc.,. Here`s a scenario analysis of impact of inflation, investment tenure and the resulting investment pattern.
Age
Monthly Expenses @ Retirement
Corpus Needed @ Retirement
Lumpsum Investment
Monthly Investment
25
230,583
41,291,957
782,050
7,971
30
172,305
41,291,957
1,378,240
14,258
35
128,756
41,291,957
2,428,929
25,807
40
96,214
41,291,957
4,280,604
47,757
A look at the table above suggests that the early you start the better you plan, you can build the corpus slowly and steadily. At the age of 25 or 30, you can easily manage to invest the amount and achieve the corpus.
The decision to retire is not an easy one, especially if you need to plan it before you reach your prime and even thought about other important priorities such as a home, a car or your children. However, it is a decision that we need to take because retirement is a certainty though it might be far out in the future.
Take aways…
> Recognize that retirement is as important a financial goal just like buying a home, a car or your children education
> It is extremely difficult to plan for retirement early since you are not sure about how to proceed since this goal is far out in the future - take professional help if required
> Starting early, with however little contribution, you could be on target to achieve your retirement goal since the power of compounding would work in your favor and you have greater chance to getting to the targeted corpus
> You just need to take care of your basic expenses post retirement since your profile would change meaningfully
