“Life is full of uncertainties. Future investment earnings and interest and inflation rates are not known to anybody. However, I can guarantee you one thing… those who put an investment program in place will have a lot more money when they come to retire than those who never get around to it.” -Noel Whittaker
Why Retirement Planning?
2. Increased Medicare Exigencies
3. Life expectancy on the rise
Look At Retirement in two different decades
|Retiring in 1980s||Retiring in 2015|
|Higher interest on bank deposits||Bank Interest rates are market linked and volatile|
|Existence of Joint Family System||Nuclear Family Set-up(3 out 5 Households in India are nuclear)|
|Lower aspirations in post retirement period||Growing aspirations to maintain pre-retirement standard of living|
|Lower life expectancy||Higher Life Expectancy|
Inflation is the percentage change in the value of the Wholesale Price Index (WPI) on a year-on year basis. It effectively measures the change in the prices of a basket of goods and services in a year. In India, inflation is calculated by taking the WPI as base.
Formula for calculating Inflation=
(WPI in month of current year-WPI in same month of previous year)
————————————————————————————– X 100
WPI in same month of previous year
INFLATION – THE SILENT KILLER
|Price Today||After 30 years|
|Fuel Rs. 70||Fuels Rs. 402|
|Food Expenses Rs. 100||Food Expenses Rs. 574|
|Education Expences-10 Lac||Education Expenses Rs. 5743491|
INFLATION – IMPACT ON YOUR EXPENSES
2. Increasing in Health Cost
- In India health care Expenses are rising at a rate of 15 to 20 %( Last Ten Years Medical Inflation year on year)
- Around 43% of hospital admission in rural India and 27% in urban India were financed by loans and sale of assets
- In 2004 around 30% in rural and 20% in urban India didn’t go for any treatment purely for financial reasons
- India is the Diabetic & Cardiac capital of the World,12 Cr diabetics in India by 2025
- Every 2.5 Minutes, a person dies of Kidney diseases in India
Source:*World Health Organization (2010-2015)
Medical Journal – Lancet
3. Life Expectancy
Defination: The probable number of years remaining in the life of an individual or class of persons determined statistically, affected by such factors asheredity, physical condition, nutrition, and occupation.
Projected LIFE EXPECTANCY IN INDIA
THE RISE IN THE OLD AGE POPULATION
1. The % of elderly in the total population of India, keeps on increasing
2. By 2050, it would reach 20% of the total population
3. By 2020, there would be about 120 million above the age of 60 in India
*Source – Population Division, Dept.of Economic Social Affairs, United Nations Secretariat
HOW CAN I PLAY FOR MY RETIREMENT
Simple following Three Mantras
1. Invest For Long Term
2. Start Early
3. Propare Asset Allocation
BENEFITS FOR LONG TERM INVESTMENTS
1. Power of Compounding
2. Long Term View Lowers your Risk
3. A Step by step Approach to beat Inflation
BENEFITS OF STARTING EARLY
Let’s take a case of Four Friends Arun, Santhosh, Krishna and Venkat who started investing at different ages and higher than the person who started earlier than them:
|Investment Start Age||26||36||46||56|
|Invest till age||60||60||60||60|
|Investment amt per month(Rs.)||1000||2000||4000||8000|
|Multiple of Arun savings||Two times||Four times||Eight times|
|Total Investment Amt(Rs.)||4,08,000||5,76,000||6,72,000||3,84,000|
|Investment value at age 60(Rs.)||31,02,957||22,37,307||14,14,475||4,69,317|
|Returns on investment(Assumed)||10%||10%||10%||10%|
Why do you think Arun got the highest savings?
Asset allocation is the highest contributor to risk reduction in a portfolio which results in a higher risk adjusted return
Impact of Asset allocation on return variability (Risk Reduction)
*Past performance may or may not be sustained
Source:Roger G.ibbotson, “Does
BENEFITS OF ASSET ALLOCATION
“Diversification is a protection against ignorance” – Warren Buffet
1. Asset allocation is a risk diversification strategy
2. Different life stage require different asset allocation
3. Share of Equity = 100 – Your Age*
4. Share Of Debt = Your Age*
5. Right asset allocation is one which adapts to your life stage and risk profile
Note * = Thumb rule for asset allocation propounded by John C Bogle
CASE STUDIES TO UNDERSTAND IN RETIREMENT PLANNING
Mr.Srinivasan is aged 45 and currently is working with ABC Ltd.as a software developer. He is earning Rs 60,000 p.m.and also earns around Rs 1,00,000 every year as incremental bonus. Mr.Srinivasan to retire at age 55.
- Details of expenditure, income and goals
- Current house hold expenditure is Rs 25,000 per month.
- Rs 75,000 a year for an annual vacation with his family (excluding the above)
- Rs 25,000 a year for medical expenses
- Maintain the same level of life-style post his retirement
- Life expectancy as 85 years(Assumed)
- Children are already educated
He is adequately insured and has created a contingency corpus of 12 months of living expenses and is maintaining this corpus in liquid funds and party as cash in the bank. As he is nearing retirement, Mr.Srinivasan is worried about how much corpus he is going to need and whether or not he will be able to build this corpus in his remaining 10 working years.
|Mr.Srinivasan Age||45 years|
|Retirement Age||55 years|
|Life Expectancy||85 years|
|Current Monthly Expenditure||Rs 25,000|
|Annual Expenditure (Vacation)||Rs 75,000|
|Annual Expenditure (Medical)||Rs 25,000|
|Post Retirement Return||6%|
|Corpus Required Retirement||RS 3,40,47,826|
So now Mr.Srinivasan knows he needs to achieve a corpus of Rs 3.40 crore to maintain his lifestyle in his post retirement period. The next in Mr.Srinivasan mind is how to achieve this huge corpus.
He is expecting to get graduity of Rs 25 lakhs and expects his EPF maturity to be Rs 48 lakhs. Over and above this, keeping retirement in mind he has invested Rs 12 lakhs in mutual funds(current value) so far and has allotted his ancestral property of Rs 50 lakhs (current value) to his retirement goal. He also has Rs 35,000 surplus savings per month that can be invested (in mutual funds expected to grow@15% p.a.)towards his retirement.
Taking into consideration the above information, let us see how much will his total achievable corpus be at retirement?
From the above table it is evident that Mr.Srinivasan has a shortfall of approximately Rs 28.51 lakhs.
Thus, Mr.Srinivasan has 3 options in the above situation:
- To post-pone his retirement by some time i.e. increase his number of earning years
- To reduce his expenditure post retirement
- To save and invest a higher amount today and going forward
By choosing one or all of the above solution options, Mr.Srinivasan will be able to build the retirement corpus that he needs, to live his golden years in financial freedom. The corpus that is built by his retirement can be invested into fixed income products and kept away from any market risk / volatility.
It is important to note however, that upon the end of his 85th year, the funds will have been entirely utilized. Hence it is always better to assume a longer life expectancy and plan accordingly – rather than run the risk of outliving your wealth and then being dependent.
Plan for your Retirement Planning in Early.
All the Best