Do You Have Enough Money For Retirement?

The Great Resignation is afoot

So, you have probably read the news about the great resignation. A trend across the US. Retirement seems to be a choice many are making.

If you haven’t, then you can check out these articles one, two, three

People are preferring to quit rather than return to the pre-pandemic work-life.
While I have not seen a similar trend in other parts, it is a possibility. So, dear reader, if you are thinking along these lines, then we have to discuss retirement here.

The reason could be anything: 1. Covid has put you in touch with reality. 2. The rat race no longer appeals to you. 3. You want to pursue other passions or any of a myriad things

Money has always held people back from such a decision. The last 18 months have given us the ability to question our needs vs wants.

How do we ensure enough wealth to retire?

Some expenses would go down and others would rise. Let us dive into it.

What does retirement mean to you?

Retirement means different things to different people. It could mean never going to an office or spending quality time with your family. For some, it means working on a passion they have been nursing for years.

Retirement also means a loss of salary.

Therefore planning is essential, to figure how much you need. You will then be able to make a better-informed decision.

Of course, this also applies to you if you are planning a regular work life and retirement in your 60s.

Why you should save for retirement, even if you want to keep working post 60

Financial freedom is necessary to pursue your passions, or to be able to do the things you like.

Let us face it, for some of us, what we like is a corporate job. We like to work in this environment.
Still, it would be good to have the choice, even if you don’t exercise it.
Yeah, like a nuclear deterrent, never to be used.

What about inflation, taxes and capital gains?

Inflation is the opposite force to compounding and steadily erodes your wealth. Your income might double, but due to inflation, its real value would be much lower. Inflation erodes wealth like nothing else.

For example, if you assume inflation to be 6% then in 12 years your expenses will be twice the number that it is today.

Next, let us not forget our familiar foe, the taxman.

You should plan your taxes in advance and be aware of tax savings instruments available to you. Especially in your 60s, the government provides good tax saving schemes, plan to use them. Spread your income across you and your spouse to minimize the tax impact.

While redeeming your investments, you will be paying capital gains tax. Even with long-term capital gains, you might pay around 20% as tax. If your plan was exact then the taxes can have a material impact.

It is an expense you need to be aware of and plan for.

What returns can you assume?

The greatest tool of wealth creation is compounding. Compounding works only if your returns exceed inflation.

Equity has traditionally beaten inflation. Within that, my usual preference is the index itself. Both Nifty 50 and the Nifty next 50 have beaten inflation comfortably in the past.

Nifty-50 has given annualized returns of around 12% and the Nifty Next-50 has given annualized returns of around 17%.

Debt funds on the other hand would give you lower returns but better capital protection.

Depending on how close you are to retirement you can allocate your investments between debt and equity.

The younger you are, the more you can invest in riskier assets like equity.

A typical thumb rule used here by financial advisors is the rule of 100. Subtract your age from 100 and the balance number is the % of your portfolio that should be in equity.

My own opinion is to be aggressive with equity till at least 5-6 years before retirement.

Even post-retirement you can plan and continue to have a sizeable corpus in equity.

But this is a completely personal decision.

How do you calculate expenses post retirement?

Based on current expenses you should project expenses at retirement. With the same living standards, the increase in expenses would correspond to inflation.

But you are the best person to determine how much your living standards should increase.

You will simplify some things such as commuting, eating out with colleagues. While other things such as travel are likely to increase. Health insurance usually grows faster than inflation.

Your expenses after retirement would probably be 20-30% lower than your last salary.

Rules of thumb to calculate how much to save as retirement corpus

Here are a couple of rules of thumb that might come in handy while figuring the retirement corpus.

Rule of 72 for inflation. This rule gives the number of years for money to double based on inflation/interest.

Assume your inflation rate is 6%, divide the number 72 by this rate. 72 / 6 = 12.
That gives you 12 years for your expenses to double at an inflation of 6%

Similarly, there is a safe withdrawal number rule. The 4% rule. This rule states that you can safely withdraw 4% of your corpus every year.

Let us assume your expenses today are equal to 1,00,000 per month.
As per this rule, you should have a corpus where you can withdraw 4% for your annual expenses.

Your annual expenses are 1,00,000 x 12 = 12,00,000

Which makes your target corpus = 12,00,000 / 0.04

This means you need a corpus of 3 crores today to fund a retirement of 1,00,000 per month.

---

Key Takeaways:

• If you are bitten by the resignation bug, then take some time to do your calculations
• Understand your current expenses and figure what of this will continue, reduce & increase
• Plan your investments according to your retirement plan and risk appetite
• Figure how much you need before you can hang your boots, using some number rules

---

---

This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any significant financial decisions.