Savings for Retirement

Most 25-year-olds have an aspiration to retire at the age of 40. They would like to spend their working life earning lots and pots of money.
At the other end of the spectrum, many 45-year-olds do not intend to retire at all, and would prefer to “die with their boots on”. They would like to pursue their interests and change their careers; maybe, even allow for a drop in earnings, but they are certainly not considering retirement.

What is Retirement?

From a financial planner perspective, retirement is when I stop depending on my vocation, skills and expertise to earn my bread, and fall back on the assets that I have created to give me adequate funds to manage my day-to-day living, after keeping aside money for emergencies so that it will last me for my lifetime. The biggest variable in this equation is, of course, that I do not know till what age I will live.

Life Expectancy and its impact on Retirement

In the not-so-distant past, people started work at the age of 20, worked in the same organisation till their retirement age of 60, and if they were lucky, lived to the age of 70. Mathematically, they worked for 40 years and their savings were required to last them the next 10. Various factors have since conspired to ensure that life expectancy has continued to rise. In our financial plans today, we consider life expectancy to be 85-90 years; and my fear is that this will continue to rise. Combine this with the growing concept of the nuclear family, and we suddenly realise that we need to plan for the time when we are not only old, but alone.

Do your Homework :

Suppose you are 25 years today and intends retiring at 40. Assuming you invests all his savings of Rs 25,000 per month (see table alongside) at 12% pa, you will accumulate a corpus of Rs 1.25 crore at age 40. During this time, inflation of 6% p.a. will increase his expenses to Rs 120,000 per month. In the course of our workings, we tend to consider returns of just 1% p.a. over inflation in the post-retirement phase. Even if your expense levels do not increase (which is unlikely once he has a family), and if you takes extra risks and earns 2% p.a. over inflation in his retirement days, the corpus will last under 10 years.

A Practical Solution

If the corpus was to last 40 years into retirement, the corpus required is nearly Rs 4 crore, which is a tough ask by the age of 40. Instead, if Sid was to extend his retirement age to 52 years, the corpus will rise to Rs 6 crore, and that will last him till the age of 80 years. Maybe, today’s youngsters need to consider this example carefully before deciding at what age they can retire, gracefully.