Rs 1 crore for retirement? Won’t last for 30 years

Typically, the thought of retirement crosses one's mind when one enters the 40s decade. This is when people sit back and think about how they can prepare for their golden years. The most important question is how much would one need after retirement to lead a comfortable retired life.

It is very difficult to have an idea of how much money you would need after 30 years. Random figures of Rs 50 lakh and Rs 1 crore is often bandied about, but are they enough?

With inflation growing at the rate it does, today's princely sum of Rs 1 crore is worth a lot less in 20 years. Based on an inflation rate of 5% per year, in 20 years time, the estimated value of your Rs 1 crore money in today's terms might be Rs 38 lakh only. This is why a correct estimation of your target retirement corpus is extremely important. If you do not know what you need, you can never plan it. DNA Money spoke to personal finance experts and wealth managers to know the right approach.

Ready for retirement

A financially secure post-retirement life awaits an individual who has accumulated an optimum retirement corpus, which eventually takes care of all post-retirement expenses for the couple.

"The question of ideal 'retirement corpus' is baffling and any underestimation of the same during the accumulation stage can lead to horrific results. Before calculating the 'nest egg' (retirement corpus) one should analyse present earnings and realistically project where one wishes to be in future," says Abhijit Bhave, CEO, Karvy PrivateWealth.

Important parameters like life expectancy, the expected inflation rate in the economy, investment returns during the corpus building stage and also during the post-retirement phase indicate the quantum of the nest egg that can be built in future. A simple thumb rule to calculate the "retirement corpus" is to compound present annual expenses by an inflation rate of approximately 5 % for the number of years left for retirement and then multiplying this for the number of years one expects to live after retirement. For example, assuming the present age is 30 years and the retirement age is 60, one would compound for 30 years (that is, remaining years till retirement). "And then this needs to be multiplied for at least 20 years (assuming a life expectancy of 80)," says Bhave.

The first step to build a sufficient retirement corpus is to separate retirement planning goals from all other short/medium-term goals like buying a car, children's' education, family vacations, etc.The segregation of retirement goal from every other-other goal ensures undivided attention on building the retirement corpus. In short "do not dip into retirement savings before you retire".

Start investments early in life, that is, as soon as one starts earning, and simultaneously lay the roadmap for retirement planning. Involving family, that is, sitting with spouse and children during the retirement planning stage is important as any financial decisions are undertaken will have a far-reaching impact on the entire family.

"All younger couples are recommended to have a high exposure to equity during the accumulation phase while gradually moving towards higher debt allocation as the time of retirement approaches. During the accumulation stage suggested asset allocation towards equity/debt could be 50-75% equity and 25-50% debt, after considering individual risk profiles," says Bhave.

On the pathway to building the retirement corpus, unexpected events like medical contingencies, loss of job, or any unexpected expenses may derail the investment process momentarily. A term insurance and a medical insurance will go a long way in providing the cushion towards any unforeseen events. Thus sticking to a prudent retirement plan, a regular review of the investment portfolio and adhering to asset allocation is the pathway to a financially secured future.

Methodical approach

The retirement corpus is best an estimate and its calculation should factor in all possible expenses one will incur post-retirement. In that sense the retirement corpus should be revised or updated regularly to make it as realistic as possible, says Rahul Jain, Head, Personal Wealth Advisory, Edelweiss.

Understanding the purpose of the retirement corpus is very important. Plainly put retirement corpus is an amount that will generate regular income to meet one's regular and fixed costs post-retirement. Since the basis of retirement corpus is expenses, the calculation of retirement corpus should start with current expenses.

Jain uses an example to help investors understand. Sanjay is 40 years of age and plans to retire at 60. His life expectancy is assumed to be 90 years. His current expenses (household, lifestyle, insurance premium, etc) is Rs 50,000 per month of Rs 6 lakh annually. This is the expense between Sanjay and his spouse. "Let us calculate his retirement corpus: current annual expenses: Rs 6 lakh, assumed inflation: 7% per annum, estimated expense at retirement (after 20 years): Rs 23 lakh. Rate of return he expects to earn post-retirement: 6% per annum (assumed post-tax). So, the present value of post-retirement expenses (60-90 years): Rs 8 crore.

There are some common pitfalls of retirement corpus calculation. It is important to know them so that you can avoid them.

Firstly, the rate of inflation needs to be close to the actuals. Jain thinks the number should be closer to our long-term average CPI of around 8% per anum.

Second is the rate of return post-retirement. "Assuming one would park his entire retirement corpus into bank Fixed Deposits to fetch regular income, this rate can be around 7-8% pre-tax. Post-tax one it works out to 5-6% per annum," Jain explains.

Thirdly, one should not forget to factor in and revise the medical expenses post-retirement. One should definitely budget in the medical insurance premium.

Fourth, life expectancy should be taken on the higher side. "Very often people take a smaller age. This makes the retirement corpus required small, hence, this approach should be avoided. Plan for higher life expectancy,' advises Jain.

Fifth, inflation and taxation will follow post-retirement. Hence these should never be ignored while calculating the retirement corpus.

Taxation aspect

While investing, we always need to look at post-tax returns. Most people ignore the effect of taxation and look at raw returns. Annuity, FD, Senior Citizens Savings Scheme, etc, are all taxable as income.

"One needs to look at whether the product in question is subjected to tax or not. If it is subject to tax, we need to see whether it would be subjected to capital gains or income tax. Normally capital gains tax treatment is more favourable," says Suresh Sadagopan, Founder, Ladder7 Financial Advisories.

An efficient vehicle for a person in the upper tax brackets would be tax-free bonds (available from the secondary markets), Public Provident Fund and Fixed Maturity Plans of Mutual Funds in the debt category, added Sadagopan.

One may even consider Perpetual Bonds/NCDs ( from secondary market). As they offer higher pre-tax returns, the returns are fully taxable as income.

The other option is equity-oriented funds which are taxable at 10%, after a one-year holding period. The level of equity exposure would be based on the client's individual situation and risk profile, he noted.

STEPS TO SECURE YOUR RETIRED LIFE

• Revise or update the retirement corpus regularly to make it as realistic as possible
   
• Don't forget to factor in medical expenses
   
• Don't ignore inflation and taxation
   
• Start investments soon as you start earning