Tuesday, 1 January 2013

[www.keralites.net] Retirement Fund – How much is enough

 

The answer will surprise you

Most of us, typically, don't know how much to save for retirement, especially since people are living longer. Thanks to rising longevity, you should hope to live at least 20-25 years after retirement which means that many years of expenses. Many experts say that after retirement, your expenses would come down only by about 20%-30% because, while some expenses would be cut, others would rise. Where will all that spending money come from, if you have no regular income? From your savings? But how much savings are needed so that you can get an investment income that is equivalent to 70%-80% of your current expenses—and this for 25 years?

Consider Sunil, 58 years old with annual expenses of Rs5 lakh at the time of retirement. He would see his spending shrink to 70% of that level or Rs3.50 lakh a year, post-retirement. That means he needs to have Rs87.50 lakh to fund his expenses over 25 years. But would it be enough if he retires with Rs87.50 lakh? We have to take into account not only his income from savings but also inflation.

Sunil and his wife spend approximately Rs100 per meal. With three meals a day, his food expenditure per day is Rs300. Therefore, his yearly food expenses would come to Rs300x365=Rs1,09,500. Sunil leads a healthy life, would be living around 25-30 years into his retirement. His food expenses would work out to Rs1,09,500x25=Rs27.38 lakh. Seems like a lot to spend on food? Here's another shocker, these calculations have not factored in inflation.

The current food inflation is at 9.80% and it had risen to as high as 17% earlier this year and was above 20% at the beginning of last year. Over the past seven years, food inflation has risen annually by 9%. For Sunil, his expenditure for the 25 years after retirement on food would be a whopping Rs93 lakh, after factoring in inflation. Shocking, isn't it? And this is just food expenses. But, of course, he would be earning income on his savings. Let's factor that in.

Assume that after Sunil retires, he earns 8% annually on his savings. How much savings would he need? To cover his yearly food expenses alone, he would have to have Rs13.70 lakh and he will draw down 1% of his costs from his savings each year (9% is the inflation and 8% is the income growth). By this process, his savings would be exhausted in 12 years. But Sunil is not only spending on food.

He has a whole lot of other expenses as well, such as utility bills, medical bills, household expenses, repairs, etc. Assume that he does not want to be in the dreadful situation of running out of his savings. How much money does he need at the time of retirement? To cover expenses of Rs3.50 lakh a year through investment income alone that lasts for 25 years (without dipping into corpus), Sunil needs Rs1.42 crore at the time of retirement. That's not a small sum and cannot be built overnight. This is why the one thing that everybody from financial planners to personal finance experts to market intermediaries agree on is this: start saving as much as possible, as early as possible and put your money in assets that grow more than inflation, over time. The answer: select mutual funds.
 
Best Regards
Prakash Nair
www.keralites.net

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