Planning Whiz – October 2022

Financial Planning

Geojit’s Investment Analyst, Gibin John, helps a couple with their financial planning. They want him to help them with retirement planning. Gibin John analyses their current investments and helps them plan to achieve their goals. 

I am 49 years old and working in a private company. My salary is Rs. 1,31,000/month. My wife is not working. At the age of 55, I intend to retire. I have not made many investments. We are residing in our own apartment. I have equity shares of Rs. 19 lakh and a bank fixed deposit of Rs. 12 lakhs. At the time of retirement, I will get around Rs. 23 lakhs from PF and gratuity. Our living expense is around Rs. 55,000 and can save the balance amount. Now I want to know how much money is required for retirement and how to invest the retirement corpus.

Gibin John, a Certified Financial planner replies:

You are planning to create a corpus for post-retirement living expenses. Your current age is 49 and only 6 more years to retire. Here our task is to find out how much corpus you would require for meeting the expenses during your retirement and how long you can continue to spend that corpus with the given monthly expense amount. I am assuming that you have almost completed all other goals.

Your current living expense is Rs. 55,000. After considering an inflation rate of 6%, living expense cost at the time of retirement will be Rs. 75,836. For getting inflation-adjusted living expenses till your age of 90 you need to have a corpus of Rs. 3 crores on the day you retire. Here we assume that the average return of 6% during the post-retirement period. Your existing fixed deposit of Rs. 12 will become Rs. 17 lakh in six years and you will get a gratuity amount of Rs. 23 lakh at the time of retirement. You also have equity shares worth Rs. 19 lakh. If this investment fetches an average return of 9% then the value will become Rs. 28.50 lakh. Therefore, you can expect a total amount of Rs. 68.50 lakh at the age of 55. For the balance of Rs. 2.32 crores, you need to create from fresh investment. There are only six years for retirement, so allocation into equity-oriented investment is not advisable. It is better to invest in debt-oriented funds or fixed-return investments. Assuming the investment fetches a 6% return, you need to invest Rs. 269000 per month to create 2.32 crore. The maximum amount you can save from your income is Rs. 76,000. If you invest the entire amount, you can accumulate around Rs. 65.50 lakh in 6 years. Thus, the maximum amount you could accumulate is Rs. 1.34 crores. By using this corpus, you can withdraw Rs. 31,500 per month in the initial year and there will be a 6% increase on the monthly withdrawal amount every year till your age of 90. This amount is equal to your current living expenses of Rs.22000. In other words, this corpus is sufficient to meet the expense till 70 if you continue the same standard of living.

This is due to the fact that you didn’t start making retirement plans early enough in your employment. If you had planned for retirement, you might have been able to build a corpus with a relatively small amount of money each month. We never know how much we would need and end up retiring with very little savings. Most of us prioritize family-centered objectives and use all our savings towards fulfilling these goals, leaving too little time for retirement.

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