PERSONAL FINANCE MUSING 22: A DIFFERENT WAY TO LOOK AT YOUR RETIREMENT CORPUS
PERSONAL FINANCE MUSING 22
A DIFFERENT WAY TO LOOK AT YOUR RETIREMENT CORPUS
My book, “Musings of a (financially) illiterate father- a common investor’s guide to wealth creation and retention is scaling new heights every day besides generating a buzz and having great sales. The book was formally launched in a glittering ceremony at Wellington, attended by nearly 600 Defence Officers and families, on 07 Aug, by Lt Gen Amrik Singh, AVSM, SM.
I will urge you to continue to share this post too as my book has been specially written to teach the alchemy of wealth creation and retention to our children-they deserve to learn it. Please support this mission of financial literacy by reading and recommending this book. The link is given below.
The book is also generating rave reviews on Amazon and Facebook. I know that the help provided by all of you in form of sharing last week’s blog post as also my facebook and Whatsapp links have helped tremendously. Renu Kaul Verma, MD, Vitasta Publishing and Editor Book Link, is a well-known name in the field of Journalism and Book publishing. This is what she has to say about the book.
“Thank you Anand Saxena for sending me your book. I like the title...Musings of a financially illiterate father...a must-read for a financially uneducated person like me. Managing personal finances is most cumbersome. Your lessons in the form of musings will go a long way to create awareness about wealth creation and retention. Wishing you all success”.
This post is the final one of the trilogy of our exploration of the all-important topic of “retirement planning”, which we began two weeks back. In the first post of this series, I had put across three models for retirement planning for your consideration. Last week, we had discussed different models to calculate the retirement corpus. To ensure a seamless transition to this week’s post, the links are provided below.
Out of all the posts that I have written so far, this one invited the maximum comments and reactions. The major concern shown was towards the size of the retirement corpus that we had calculated using the 4 percent rule. It was considered too large and may be beyond reach to accumulate. Let me state once again that 4% withdrawal rule (say between 4 to 6 percent) is a proven rule and will ensure happy and satisfied sunset years while still leaving behind sizeable corpus for your progeny or social causes.
But, do we really need that huge a corpus that we calculated last week? If you recollect it was Rs 4.68 crore for someone requiring a post-retirement annual income of 18.75 lac (retiring with annual income of Rs 25 lac?) Not really- and to recalculate, let’s first revisit our rule of thumb, that is, one would need approximately 75% of pre-retirement income after retirement, to maintain the same lifestyle. So, if you retire with an annual income of Rs 25 lac, you will require around Rs 18.75 lac annually after retirement.
In actual, one can maintain the same post-retirement lifestyle as in pre-retirement, with only 50% of income. If you look at the major expenditures while one is serving and keep deleting them post-retirement, you can reach a ballpark figure.
Saving Normally, one saves anything between 10 to 20% (my recommended figure is 20% of gross pay) of pay. After retirement, with all your liabilities settled, you don’t need to save.
Debts/Loans Normally we have at least house and car loans running. In addition, one may have education loan, personal loan, consumer loan and maybe even credit card loan. These loans and debts total up to around 30% of pay (figures may vary but for calculation purposes, we suppose this figure). Normally, one would clear off all these debts before retirement.
Children The expenditure on raising the children and their education would be settled by the time one retires. In addition, if the children are also married, the savings being set aside for this task also need not be continued. The household expenditure thus easily reduces by 10-20% with children settled.
Office related expenses The expenses on clothing, socializing, commuting et al will also stop post-retirement. This will shave off around 10% of the expenditure.
Medical The expenses on medical as one ages, are bound to rise. However, if one is covered medically by the employer or has taken a health insurance, this expenditure will be offset. Even in the absence of these, the expenditure will increase by around 10-20%.
When we total up all these reduced and added expenditures, one can see that it is not difficult to live on 50% of pre-retirement income. Thus, like all thumb rules, the 75% of pre-retirement income rule is also a very broad guideline. So, if we now recalculate the retirement corpus for someone retiring with an annual income of Rs 25 lac (post-retirement requirement of Rs 12.5 lac annually) it will come to a much reasonable figure of Rs 3.13 crore (12.5*25) and not the humongous figure of 4.68crore. In fact, the practical figure is only Rs 2.5 crore taking a figure of 5% (the mean of 4 to 6 percent withdrawal rate).
Does this corpus still look formidable? If you are methodical with your investments, it is actually not. Let’s take the example of a person who starts to earn Rs 50,000 per month at age 25 and retires at age 60 with a 6% annual increase in his pay. With these parameters, he will retire with an annual pay of Rs 46 lac. If this person invests just 10% of his pay (Rs 5,000 per month) all this while, increasing the savings by 6% per year to cater for inflation, he will retire with a corpus of Rs 4.8 crore (assuming a return of 12%- very reasonable with astute asset allocation, about which you will learn in my book).
Now applying the rules of 5% (corpus) and 50% (post-retirement income,) his requirement of annual income will be Rs 4.6 crore. See how close it is to the required figure e.g. 4.8 crores? All his other obligations like children’s education, marriage, other aspirations like house and car etc. can be met by investing another 10% of his pay- thus the magic figure of 20% saving.
And here comes the beauty of a pension or annuity- normally given at the rate of 50% of the last drawn pay. Voila, you already have the required monthly income even if you have zero retirement corpus. Yes, you read that right- I have just proven that you can easily maintain your pre-retirement lifestyle with pension alone. Of course, it will cater to only your basic needs and not other aspirations like yearly foreign travels and so on. For other aspirations, one still needs to save @ 10% beginning the first paycheck.
Let me then summarise the two most important takeaways from this trilogy of posts. Firstly, set aside 10% of your pay from the first paycheck onwards, increasing by 6% annually to cater for inflation and invest it wisely to get around 12% return (read my book for details). You will end up with a retirement corpus which will provide you with adequate income to maintain your pre-retirement lifestyle.
Secondly, if you are a pensioner, even if you retire with zero retirement corpus but your liabilities are settled, you are not badly off. The only thing to take care of is your health insurance which you should take early in your life (including for your spouse).
My book (paperback) is currently available domestically on Amazon.in, Flipkart, Infibeam and Notion press, and internationally on Amazon.com and Amazon.co.uk. The e-Book version, including Kindle, should be ready in another week. I will keep you updated in my next post.
For now, enjoy your Sunday while reading my book- you have earned it.
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