Financial planning can give clarity on retirement goals

What is meant by clarity on retirement goals? It is about estimating your retirement corpus and also building insurance and liquidity into it.

Apr 28, 2019 02:04 IST India Infoline News Service

Retirement Planning
The concept of retirement planning is undergoing a shift in India. It is no longer the traditional focus on provident funds and pension plans. Young executives are starting retirement planning much earlier and using the power of equities to create a substantial corpus for retirement. Here are 3 principles based on which you can ensure that you not only plan your retirement but also give yourself the choice to retire early.
 
Get clarity on your retirement goals
What is meant by clarity on retirement goals? It is about estimating your retirement corpus and also building insurance and liquidity into it. Let us look at the first step. A young executive starts saving at the age of 30 and plans to retire at the age of 55. Let us go about estimating the retirement corpus assuming that he earns Rs100,000 per month and his monthly expenses are Rs60,000 per month currently. He can save Rs10,000 per month towards his retirement corpus. But this monthly expenditure will have to be inflated to a future date. Here is how!
Particulars (Starting) Amount Particulars (Ending) Amount
Current monthly expense Rs60,000 Years to retirement 25 years
Expected Annual inflation 5% Monthly SIP Rs10,000
Monthly expense at 55 Rs205,000 SIP in which instrument Equity Funds
Post Retirement in Debt  Funds CAGR Returns 14%
Yield on Debt funds 8.50% Corpus at age of 55 Rs2.72 cr
Corpus Required Rs2.89 cr Corpus shortfall Rs17 lakhs
 
A combination of starting early and using the equity route allows the person to get quite close to his target corpus of Rs2.89 cr. However, he still falls short of the target. What is the way out?
 
Structure your retirement payouts better
The key here is to structure the retirement payouts better. Instead of putting the entire money in a debt fund and earning just the returns, a better way would be to structure it as a systematic withdrawal (SWP) plan over a longer period. Since he plans to retire at the age of 55, assume that he pays himself through SWP for 25 years till the age of 80. How will it work out?
Year Corpus in Debt  Fund Annual Interest  income 8.5% Annual Withdrawal  Closing Balance
Year 1         272,00,000              23,12,000 25,31,000 per year      269,81,000
Year 5         262,05,846              22,27,497 25,31,000 per year      259,02,343
Year 9         248,28,090              21,10,388 25,31,000 per year      244,07,478
Year 13         229,18,714              19,48,091 25,31,000 per year      223,35,805
Year 17         202,72,589              17,23,170 25,31,000 per year      194,64,759
Year 21         166,05,434              14,11,462 25,31,000 per year      154,85,896
Year 25         115,23,275                9,79,478 25,31,000 per year         99,71,753
 
In the above table, we have just shown the numbers for every fourth year to avoid clutter. The bottom-line is that the retirement corpus of Rs2.72 cr can be invested in a debt fund yielding 8.50% and gradually withdrawn through a SWP. You end up getting Rs2.11 lakhs each month (25.31 lakhs / 12) from your retirement date for 25 years. It is also tax efficient. We have also built a safety net into this SWP. At the age of 80, he would still be left with a corpus of nearly Rs.1 crore and that should act as a good buffer for him at that age.
 
Leverage the power of online goal planners for the purpose
The big question is how can the investor go about this kind of detailed planning? Technology has ensured that most of these planners are available to you at the push of a button. These online planners can be used to crystallize goals, plan for the same and also monitor and rebalance where necessary. In a nutshell, if you want to really retire (rewire) early then start early, plan smartly, draw down systematically and monitor everything in a real-time manner; anytime, anywhere!

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