Numerous books give valuable insights on how to retire rich. Most of them talk about how you need to start at a very early age and diligently keep investing every month preferably in equity from a young age. The power of compounding is also explained and how setting aside small sums of money over a long period helps you to retire with a good corpus that can help you take care of your needs post-retirement.
But what if you have already missed the bus? You are already nudging past forty or fifty and you are not having much savings. Still, it is not late. Tomorrow is the first day of the rest of your life!
Most retirement planning books rely on rules of thumb. But everyone is different with different needs and a one size fits all approach is not something which is ideal. Retire with Dignity provides a generalized approach that can be customized to everyone’s needs.
1. You may retire but cost inflation does not retire
The cost inflation index is a reasonably good proxy for future inflation. Between 2002 and 2020 this index has been increasing at an annualised rate of 6 percent per annum.
At this rate, a monthly expense of 50,000 today translates into 1,60,000 in twenty years’ time. Expenses continue to increase every year and your retirement corpus should be such that it is able to provide you with an increasing income stream that offsets that impact of cost inflation. So how much is enough?
2. Are you ready to retire? How many years more do you need to work before calling it a day?
If you save a good proportion of your income, every year in service increases your retirement corpus and reduces the number of years for which your retirement corpus should support you. There finally comes a stage when the retirement corpus finally crosses the magical threshold such that it can produce an income stream that increases every year and still survive more than you. Once the threshold is crossed you work because you want to and not because you have to. So when will you cross the magical threshold?
3. The minimum number of years up to which your retirement corpus should last
Current estimations of life expectancy are around 85. However, life expectancy has increased by about 6 years over the last 15 years. You need your retirement corpus to survive more than you. Will your corpus provide you with an increasing income stream until you reach at least 95? If you retire at 60, you may have 35 years’ experience and you need another working life to be supported with just your retirement corpus. Do you have enough?
4. Equity is an important asset class for retirees
Despite its volatility, equity is an extremely important investment avenue for retirees too. This goes against conventional wisdom. On a rolling 10 year or 15-year basis, the NIFTY has never given negative returns. NIFTY has consistently given annualised returns of 10 percent or more over any 15-year period. When you are planning for 30+ years equity is the most tax-efficient way of managing your investments. So how do you use equity to manage your retirement corpus? What is the trimester strategy of retirement corpus management?
5. How long will your corpus last for varying degrees of consumption?
You need an income stream that beats inflation. An increase of 5 percent-6 percent per annum is needed every year. So how much should you consume from your retirement corpus?
If you withdraw 10 percent of your initial retirement corpus every year for expenses and you generate only 6 percent return every year the corpus will last only 15 years. But if you want the income stream to increase by 5 percent every year the corpus can survive for only 11 years.
So, what is the combination of the rate of the initial corpus that can be withdrawn and the return that you generate that can provide you with income for your remaining lifetime? If the desired corpus is not available, by how much should you modify your lifestyle?
6. Insurance needs
What are your post retirement insurance needs?
(Extracted from ‘Retire with dignity: A do it yourself retirement guide for the 40+’, authored by Sharad Ramnarayan. This is an eBook)