“Retire” literally means “Withdraw to a safe place”.
Is that how you see your retirement life?
An average person is going to spend almost one-third of their entire lifetime in retirement.
It is, by definition, has to be a safe and comfortable place.
Yet, a majority do not seem to think about their retirement life until they are well into their 40s.
It is bewildering—that in a time where even a weekend has to be planned, retirement planning is not given much thought.
In this article, we will address the reasons possible that are against taking retirement planning more seriously—and the misconceptions around it.
When you are ready, this step-by-step article will guide you to create your customised retirement plan from scratch.
Table of Contents
1.Dangerous Misconceptions around Retirement Planning
Before we get into retirement planning, it is necessary to see why you need it.
We must address the things that are forcing people to go for false retirement plans and how it happens.
It usually starts with an idea,
“I have enough time to do it.”
Almost everyone has this thought when it comes to retirement planning.
You are young, earning well, and have financial goals.
It seems completely logical to have your focus on financial goals that are near and higher priority—like your children’s education fund.
After all, your retirement is at least a couple of decades away.
The outcome: postponing your retirement plan.
But a time comes when you’ll realise that you have very little time to save for your expenses of at least 30 years with no income in retirement.
Financial freedom may never become real when you retire.
That being said, some people take retirement planning seriously sooner than later.
However, the prevalent misconceptions around retirement planning in India misleads them.
For example: Imagine you go out and pick a random person to ask what they have planned for their retirement, you are more likely to get answers like,
“I have my EPF, Gratuity, I also have FD investments and rental income. I think that will be more than enough for me. Not a big deal.”
To be honest, this is not even a plan. These are just a list of potential sources of retirement in their mind.
Or might get answers like,
“I take my retirement seriously, which is why I have invested in this retirement pension insurance plan. My retirement life is secured.”
Readymade retirement plans like investment insurances and ULIPs or even sources like rental income and EPF gives a false sense of security.
All these create nothing but an illusion of secure retirement.
If you can see the working out of such a “retirement plan”, it will be like watching a plane crash down in slow motion.
These false retirement plans do not even answer the fundamental retirement questions.
How long your retirement life will be?
How to calculate your retirement corpus?
Can it ensure your financial freedom?
It is a real problem with these retirement products.
You will have to adjust your needs and comfort to fit into these plans.
You cannot course correct your plan based on your real-life situations.
You will never have the chance to consider a different optimal scenario.
Your important life decisions while in retirement will be dictated by a readymade retirement plan.
Are you willing to cram your retirement life into such false retirement plans?
Don’t you think that a reliable retirement plan should take your choices and decisions into account?
Don’t you think that your retirement life deserves a retirement plan custom made for your life?
That is exactly what you are going to get by the end of this retirement planning guide.
So let’s begin!
2.PLANNING YOUR RETIREMENT
We aim create a custom retirement plan that is optimal and realistic.
To achieve that, you have to create a retirement plan that is reliable and achievable at the same time. Focusing on either of these too much could make your retirement plan an impractical one.
With this clarity, you can start your guided retirement planning in a step-by-step approach categorized under,
Even though these are broad categories, you will get down to the precise details of all things necessary in the form of mini tasks.
Complete these mini tasks one at a time, by the end you will have a solid and reliable retirement plan custom made for you.
That being said, let’s begin with the never compromising time and its different role in your retirement life.
3.RETIREMENT AND TIME
A straight-up fact about retirement and time is that the earlier you start your retirement planning the more flexible it will be.
A major benefit of starting early with your retirement plan is that you do not have to worry about delaying your retirement or compromising on your financial goals.
The more time you have, the lesser financial stress you will have about retirement planning.
Which begs to the question,
“At what age have you planned to retire?”
Followed by that is,
“How long will be your (retirement) life?”
On the outlook, these questions can are easy to answer.
But at the same time, it has a great significance since your entire retirement plan will be built on these simple answers.
Hence to find answers to these questions, you must decide two important things:
Your current age is obvious.
But with your retirement age and life span, you have to be as realistic as possible. These two define how long your retirement will be, in turn, how much retirement corpus you will need.
So how can you make these choices to be as realistic as possible?
Only by understanding it better as discussed below.
i.Choose Your Realistic Retirement Age:
You might already have chosen a retirement age in your mind.
It could be 55 or 58 or maybe at 60 years.
Whatever your chosen retirement age is, you have to make sure it is as realistic as possible.
It is because there are too many factors at play in choosing your age of
A few factors that might influence your retirement age are:
- Health issues
- Job insecurity
- Unexpected disability
- Unfavourable family situations
- New unexpected financial goals
These could force you to retire sooner than you expect to, except for the “new unexpected financial goals”.
For example: You may plan to retire at the age of 60. But you may have a health issue, say a heart condition, which requires you to live .stress free life. In that case, retiring early could be the best choice.
If you feel fit, physically and mentally, you may even postpone your retirement. You don’t have to care about postponing your retirement.
But accounting unfavourable scenarios, expect yourself to retire early by at least 2 years than you have planned to.
For example, if you hoping to retire by the age of 60, make it 58 in your retirement plan.
In this way, your retirement plan gets the flexibility to adapt to unfavourable scenario, if necessary.
ii.Choosing Realistic Lifespan:
To choose the realistic lifespan, it needs the stark opposite approach.
I.e., expect yourself to live longer than you think.
Statistics say that the average lifespan of a person in India has increased by 8 years just in the past 20 years.
With the advancements in medicine, you can expect to live a comfortable life longer than you think.
Discussing with your primary physician can be a good start to arrive at your realistic expected lifespan.
Else, you can take your expected realistic lifespan and increase it by at least 2 years to be on the safe side.
So, if you think you have a realistic expected lifespan,
Now, as you have the required numbers to complete this step of retirement planning, calculate:
- Years till my Retirement: __________
- Years in Retirement: __________
The “Years till my Retirement” will give you how many years you have left to save and invest for your retirement income. The longer it is, the better it is for your retirement plan.
On the other hand, you have the “Years in Retirement”.
The number of years in your retirement life will be crucial in calculating the optimal retirement corpus.
How much is considered an optimal retirement corpus?
Can it provide for all the expenses in retirement?
Find out the answers below, as you enter the next phase of creating your retirement plan. That is,
Any retirement plan’s goal is to attain financial freedom.
Here, as discussed before, we are focusing on doing it with reliability and achievability of the plan.
A very large retirement corpus will be surely reliable, but whether a person can achieve it or not will be an unanswerable question.
And the vice versa is also true.
Hence we’re going to calculate your optimal retirement corpus by balancing these two aspects in 3 different stages.
Starting with your current expenses to ultimately arriving at your optimal retirement corpus, the 3 stages go as,
You know that your present-day expenses will naturally lead to your retirement expenses. And your retirement corpus is going to be the source for your retirement expenses. This is a clear, unmistakable relation.
Hence, unlike a readymade retirement plan, your present daily and monthly expenses go on to create your customised retirement plan that is entirely based on your lifestyle.
So how do you spend today that is going to impact your retirement life?
Let’s take a look at your,
To calculate your retirement corpus, you must know your expenses in the future.
That is after your retirement.
We can do that by taking your present-day expenses and convert that to your expenses in the future.
It’s a simple calculation. But the data you use should be as real as it can get.
It is better if you already track your expenses; both monthly expenses and annual recurring expenses. And have this relevant information stored somewhere.
Even if you do not have any dedicated information about your expenses, it is not an issue.
You can easily pull your bank and credit card statements in no time. It will give you all the information we need in this step.
Using these statements and expenses information,
- i.Gather at least more than 2 months’ expenses record.
- ii.The more the number of months considered, the better it is.
- iii.Do not include expenses that go away in Retirement:
- a)Rent payments
- b)Or Home loan premium payments
- c)Life insurance premium payments
- d)Children’s education expenses
- e)Any other expense that seems to go away
- iv.Find out how much you spend a month on average.
- v.Calculate annual average expense by multiplying by 12.
- vi.Add any other annual recurring expenses.
On a side note, keeping track of your expenses by yourself using a tracker or an app improves your cash-flow awareness.
Download your monthly-expenses tracker here.
Over time, you can identify all the unwanted expenses and cut them off.
This move will have a positive impact on your life and investments.
So, now that you have your present-day expenses, you can proceed to calculate your expenses in the future.
In other words, your retirement expenses.
Expenses in the future is directly influenced by your expenses today.
But there is also a minor strategic correction that you must not miss.
It is because when you retire, many years from now, you are going to deal with a lot of change. The biggest of all is the retirement itself.
Once you retire, you give up some expenses; but you also pick up some new or additional expenses.
For example: When you retire, your life insurance premium becomes an unnecessary expense, so you can lose it. But, since you might need additional health care in old age, you might want to increase your health insurance cover. Thereby increase in expense at retirement.
Also, you have to keep in mind that, when you retire you lose your employer-provided health insurance cover. So you will have to optimize your health insurance policy by increasing the health cover.
Try and find all such new changes that are most certain in your expenses and add them to your expenses in retirement.
Some of the new expenses that you might pick up when you retire are:
- Additional healthcare expenses
- Vacation expenses
- Retirement hobby expenses
- Gift to children/grandchildren
- Any other new expenses that seem fit
These are mere suggestions that have the highest probability to be included in anyone’s expenses in retirement.
If you can see any other expense you might have in the future, you may include them in the list. Then using this custom checklist of yours, add all the new expenses at retirement in today’s value.
With the resulting sum of expenses in the list and the “Present-day expense/year” that you calculated in the previous step, you can calculate the
You have to note that all these values are in today’s value. We have not considered the inflation yet.
Once we have the “Total Expense in Retirement” in today’s value, it is much easier to calculate your retirement corpus.
It is your one target sum that you can focus on without worrying about anything else regarding your retirement plan.
iii.Calculating the Optimal Retirement Corpus:
With the calculation of your retirement corpus, your retirement planning process will be complete.
Based on your expenses and your retirement period as calculated in the previous steps, you can very easily calculate your retirement corpus.
That is, your retirement corpus in today’s value.
And if you factor in the inflation rate, you will have your reliable retirement corpus.
Let me show you with a model calculation. Refer to the table below.
It looks pretty easy and straight forward, doesn’t it?
It would certainly look like a very reliable sum of corpus too.
With the extensive expenses calculation and proactive inclusion of future expenses, you have made sure that your resulting retirement corpus is reliable. And it shows.
But, how achievable is it for you?
Should you work with a plan that may never be achievable?
A plan with an impossible goal is as good as a non-existent plan.
So how can you optimize this retirement corpus to make to achievable?
Yes, through investments.
You are going to invest your retirement corpus in some investment instrument. And it is going to give you a return on investment at some rate depending on the nature of the investment instrument.
You can optimize your retirement corpus by factoring in those investment returns in the future investment.
But this is where it gets complicated. It is because you have to calculate the future corpus value based on the future investment returns.
That is too many uncertainties and too many variables.
To make this step easy, you can use the retirement corpus calculator.
This calculator will take in an assumed rate of return on your retirement corpus.
By doing so, your resulting optimal retirement corpus becomes achievable and stays reliable at the same time.
Also, your limited time should be focused on getting accurate information and not on complex calculations.
Finally, before jumping to the calculation itself, let’s list all the necessary information in one place.
Enter these values in the retirement corpus calculator below to calculate your optimal retirement corpus.
Are you surprised with your optimal retirement corpus?
Does it look achievable for you?
Or do you think it is reliable?
Since you have dedicated your time and entered the values as accurate as possible, it is as reliable as it can get.
Also, by going through these information gathering and calculation by yourself, you have developed a commitment to your retirement plan which you may not develop otherwise.
With the completion of this step, your retirement planning is technically complete.
Retirement planning is a big step in your finances and your life as well.
Now you only have to accumulate this retirement corpus amount by the time you retire. That is one clear, well-set, long-term goal to achieve.
But there is still one question remaining unanswered.
How are you going to execute this plan?
But not to worry, Holistic has you covered on that front too.
Read our Investment strategies to achieve your retirement corpus.
If you have any comments or questions, write them in the comment box below.
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