Reader Gaurav wrote in some time ago with a question about retirement investment options and plans, and I have been thinking about them for some time now. But every time I think about investment options, my mind wanders to the question of how much do you really need to retire?
To answer that you need to think about the following questions:
1. How much money will you spend per annum ?
2. How many years do you have till retirement?
3. Number of years you need the money after retirement.
4. Annual Inflation
5. Expected return
Take a look at this Retirement Calculator from Bank Rate. It lets you plug in the numbers, and tells you how much money you will need at the time of retirement to last the rest of your life.
It also tells you how much money you need to invest today to get to that number on your retirement age.
I suggest you play with this calculator alone because you don’t want people hear you yelling obscenities when this thing throws up the number you need today (not that it happened with me).
But I am not really interested in the number that I need today – I am interested in the number that I need when I retire, so my next instinct was to try and plug these numbers into a Systematic Investment Plan calculator to see how much money I need to invest per month to get to the final amount at my retirement age.
Now, the thing with this is that you need a SIP calculator that allows you to increase contributions every year because you are on a really long time horizon, and if you say you are going to invest 15,000 every month – that might be big now, but in 15 years time, it will probably just buy you a movie and popcorn.
Use this increasing SIP calculator to plug in the numbers and find out how much you need to save today to get enough for your final retirement plan.
Using this calculator brought me close to a reasonable but significant number, and I must say this has been a really good exercise for me to see how much I need for retirement, and then back calculate to see what I have today. The numbers seem a bit daunting today, but I am much better off because now I am not shooting in the dark, and have some sense of what I am looking at.
Play with the calculators, and be careful about your assumptions, that will make a lot of difference. Hopefully you will come up with a number that will be the beginning of a solid retirement plan.
It is a very simple calculation.
Suppose your annual expenditure is Rs. x. i.e you can lead a comfortable life if you get Rs. x per annum as of today.
Assume you would live for n number of years more.
Then the corpus fund you must have in your account today is Rs. x * n
If so, you may retire today.
For example, suppose you can lead a comfortable life in Rs. 6 Lakh per annum. And suppose you expect to live for 50 more years from today. Then if you have Rs. 6 Lakh * 50 years = Rs. 3 Cr in your account today, you may retire peacefully.
This simple formula can be applied by individuals at any age. Even if you are 30, you may retire today and live a comfortable life and maintain the same standard of living, if you have the necessary corpus fund today.
This calculation takes care of inflation rate (which obviously would always be lesser then bank interest rate on fixed deposits at any point of time) and income tax to be paid on fixed deposits. It also takes care of medical and other incidental expenses incurred at old age. This formula can never go wrong unless you incur some major expense like for example, you need to buy a new house.
I am assuming that the retired person owns a house (or pays a house rent that is already accounted in annual expenses), pays taxes honestly, invests savings in fixed deposits in a bank (and does not gamble it on Equity or Shares), does not have any debts or liabilities and more importantly does not intend to leave any wealth for a nominee.
I am retiring in the next 2 years 9 months. Since my Son is still studying, i do not have enough money in my Bank.
I will get PF of about Rs 10Lakhs after retirement/
I also have a site which would fetch me about a Crore Rs if i sell after i retire.
Please let me know how i should invest to ensure i get atleast Rs 60K Per Month after retirement.
Is the above Money sufficient for getting Rs 60K per month?
I have around 10 acres of ancestral land in my native and around 1.2 kg of gold and around 10 lacs in cash. I do not have any income and i pay 5000 as LIC premium every month for next 10 yrs. I would be getting 1.5 lacs every 4 yrs as money back from it. I am getting interest of 10000 for the cash that i have in hand which i am investing in a chit ( it is an continuing cycle..i keep investing the interest in chit – kind of slow growth of money but that is how i built this 10 lac corpus!!) My day to day expenses are met by my spouse. I was working till last month but i have discontinued for the sake of my son who is 2 yrs old. Am planning for another kid a year later. Now my question is if in case i need to take care of my children’s education how much money would i require and how best can i make it with the fund that i have now ( without my spouse’s help). I can give the land to my son and the gold to the girl (to be born) for their future.. but for their education am not sure…need inputs
It’s hard to say about education expenses because it varies so much from what they will eventually do and from one college to another, but in general if I were in this situation I would not take any more LIC policies or any other insurance policies.
Instead I would focus on safe investments like the PPF or the high interest paying fixed deposits. I don’t think anything fancier than that is not needed. If the Chit has worked out well for you, and it has no risk with it then that’s probably fine as well.
Excellent post. The calculators are very useful
Hi
My prob is difficult. At the partition I was 13 years old and living in E Bengal which became E Pak. I had no say,father dying with TB. Shoud I have moved to India at the age of 13, no support and become a refugee, begger as I had no relatives in India then and now. I came to UK in 1953 and made a success. I have ample fund. I’m reitired and I want to spend rest of days in India so that I can devote all my money and time in charitable work for the poor.I have written to the Home Minister to give me citizenship or P 10. I know India has stringent policy for those who had Pak document at any time.Will I be successful with my application?
Do you know a solution of my predicament? Any ethical person I can write to for help?Thanks.
I’m afraid I don’t have any info on how that could be done. All the best!
Hi manshu, finally found someone that might be able to help us out. I have been living in canada for 15 years. Thinking about coming back to india and retire. Currently if we were to move back we would have close to 4 crore. That we would bring back to india for our retirement. Still would have a paid off house in canada just incase if something were to not settle right in india. We just have one child that we would have to put thru higher education. We have a house in jalandhar punjab which is paid for. So do you think for us with this kind of money we would be able to retire easily if we were to make a move in a year or so?
Hi Paul, Although I don’t know your age, or your lifestyle, I’d say that 4 cr. is a fairly big sum, and if you don’t see any events that can make big dents to your corpus I’d say just a fixed deposit of that sum will fetch somewhere around the 8% mark, and that ensures quite a good lifestyle in India. All the best with your decision!
The big question is what kind of lifestyle do you plan/expect to maintain in India? Having a house paid off in India is a good start. Education expenses and health care should be the 2 things that will worry you the most.
Hi Manshu,
For the past 3 years, I have been investing quite heavily in MFs, ETFs and stocks in order to build my corpus for retirement. But over a period of time, say after 10 years or so, my plan is to move my investments to less risky investment avenues. But in 10 years, I would hope that my market portfolio would be worth a substantial amount. Anything more than 10-15 lakhs is a substantial amount for me 🙂
Now my first question is, is it wise to move all this amount to safer avenues in 10 years? Or should I hold on for a few more years? Or should I move it out in phases? I still have 20 years from now to retirement.
My next question is, where can I park this amount so that it still generates an interest, albeit a much lesser one than the market? Can I place the entire amount in an FD? I already have FDs and PF/PPF but no other safe investments.
Hi Amar,
I hope you see awesome growth in the next few years, and your long term attitude to investing helps you during your retirement.
1. Moving stuff out in phases may be more practical and easy for you, as you find other opportunities to invest in, and can sell some of your equity positions to get into something else. I think it makes sense to move to safer positions just 10 years from retirement, and it might be a good idea to move to some safe investments even now.
2. There are several options like fixed income mutual funds, monthly income plans, post office monthly schemes, PPFs, Kisan Vikas Patras, and then there are some hybrid debt – equity funds that can help you protect your capital, and get a little exposure to equity as well.
All the best – I really do hope that your long term attitude pays off!
Thanks Manshu.
You’re welcome Amar, appreciate your response.
Hi,
I have been following your blog for quite a while now and am really thankful for some of the helpful points that it has given me in my planning for investments – both short term and long term.
About retirement planning I would actually include in the following points here.
– I am already saving the required money in my PF. Currently if I need 30000 pm, without any liabilities – such as home loan, car loan, childrens education etc… 28 years from now I will need approx Rs. 2.5L pm. The PF money should be enough for this.
– According to my philosophy lifestyles and investments(home, car and childrens education) keep changing every 4 years , because of which you might want to budget your SIPS too.
– I divide the remaining amount of what is left of the lumpsum into 2 parts.
– One half is put down for short term investments, such as a vacation and buying anything with lumpsum cash such as jewellry, gifts etc.(I have a seperate SIP for these)
– Second half is put it into SIPs for different MF’s whose portfolio I change once every year if needed, but mostly midcap, index and sectoral funds. which remains as my retirement fund and our family fund too for long term goals such as childrens education/ marriage/ down payment for a second home.
– I think real estate rental income is the only possible bet long term as the rents increase against inflation, so planning for any rental income with a good property investment can also be a good idea.
Please let me know what you think of the above.
Chitra
(PS : All the above after you have build the emergency 6 month fund)
Rental yields at most places in India are quite low, so that’s one problem with relying on rental income if you plan to buy a home now. There is quite a bit of price appreciation expectation built into home prices, so if you compare rental yield to say interest income – that might just match up to what you get in a savings account.
Now most people can take loans to buy a house, so that creates a bit of an illusion on the real value of this type of investment. I suggest you read this post that sees this thing in a different light:
http://baselinescenario.com/2010/08/23/housing-in-ten-words/
The other part of your plan (earlier ones) sounds great, and it shows that you have done a lot of thinking on it. If you can save enough in your PF account that it will last you through your retirement at 2.5 l per annum say for 25 years – and still have money to spare then that’s just great.
The thing here is whether the money will really be enough? I mean what is the withdrawal rate you are expecting from the lump sum every year once you retire? How much do you think will your returns be on your retirement sum given that a large part of that will probably end up in ultra safe investment.