Have you ever considered what might jeopardize your retirement savings? While planning for retirement, it’s crucial to think beyond just the amount you save.
What if unexpected medical bills arise? Are your investments truly beating inflation? How will taxes affect your income? And what happens if you live longer than anticipated?
These questions highlight key factors that can significantly impact your retirement corpus.
Let’s delve into these considerations to better prepare for a financially secure retirement.
Table of Contents:
- Understanding Your Retirement Corpus
- Calculating the Retirement Corpus
- 4% Rule Of Thumb For Retirement
- Good Corpus for retirement
- Takeaway
Understanding Your Retirement Corpus
Retirement Corpus Meaning
What is Retirement Corpus?
“Retirement is the only time in your life when time no longer equals money”
Have you wondered what the term ‘retirement corpus’ actually means? Simply put, it’s the total amount of money you’ll need after retirement to cover your living expenses.
This corpus ensures financial stability for both you and your spouse until both of you have passed away. But how do you calculate this amount? Let’s look at a real-life example to understand better.
Retirement Corpus Example:
Anita, who is 40 years old, wants to retire at 65 and needs ₹75,000 per month as per today’s cost trends. Is this enough data to calculate her retirement corpus? The answer is a resounding NO!
Calculating the Retirement Corpus
To determine the retirement corpus Anita needs at age 65, we must consider inflation. Assuming an inflation rate of 5%, let’s see how expenses will evolve,
- After the first year of retirement, annual expenses will be ₹9,00,000.
- After the second year, they will rise to ₹9,45,000.
- And this trend will continue.
This wisdom emphasizes the importance of understanding and planning for your financial needs in retirement.
By considering these factors and planning accordingly, you can ensure a comfortable and financially secure retirement.
For more details you can also refer our recently published article How to Accurately Calculate Your Retirement Corpus in India: A Step-by-Step Guide
1. Health Insurance
In today’s economic climate, the rising costs of healthcare are hard to ignore. Medical expenses are soaring, yet many individuals choose to forgo additional health insurance, relying solely on their employer-provided coverage.
The logic often follows: “Why pay an extra ₹20,000 annually when you’re already covered through your job?”
But is this approach truly wise?
“Price is what you pay; value is what you get.”
-Warren Buffett
Investing in health insurance isn’t just about paying a premium, it’s about securing future value and peace of mind. Health can be unpredictable, and relying solely on employer coverage might leave you vulnerable.
Take, for instance,
Rajiv, who decided not to purchase separate health insurance until he turned 62. When he finally sought a policy, insurers declined his application due to pre-existing conditions like hypertension and diabetes. Within just two months of retirement, Rajiv faced a hospital bill of ₹32 Lakhs.
You might ask, “How can a hospital bill reach ₹32 Lakhs?” It’s a valid concern. If today’s average hospitalization cost is around ₹4 Lakhs, an 8% annual inflation rate could escalate that amount to ₹32 Lakhs over 25 years. And remember, an 8% increase in healthcare costs is on the conservative side.
If Rajiv subtracts this expense from his retirement savings, he would only have enough to spend approximately ₹50,000 annually until he turns 85. While ₹4,000 a month might not seem significant initially, the impact of recurrent medical expenses on his retirement corpus could be devastating.
Some might argue, “What if I invest the premium amount in equity mutual funds instead?” It’s a compelling argument.
Imagine Rajiv pays an annual premium of ₹20,000, increasing every five years, and invests this amount in equity mutual funds with an expected 10% return. After 25 years, this could build a fund of around ₹40 Lakhs.
Yet, considering a scenario like Rajiv’s, ₹40 Lakhs could be wiped out in one major medical event. How would he manage additional emergencies?
In a medical crisis, sheer value may not suffice without adequate preparation.
2. Returns Over Inflation
“Inflation is the one form of taxation that can be imposed without legislation.”
– Milton Friedman
In the previous example, we assumed a 2% return over inflation. But what if the returns were equal to the inflation rate, meaning there were no returns above inflation?
In this case, the required retirement corpus would need to be approximately ₹8 Crores—₹1.9 Crores more than the initial estimate of ₹6.1 Crores.
If Rajesh had planned for a corpus of ₹6.1 Crores with a 2% return over inflation, but his actual returns match inflation, he would need to adjust his spending.
Instead of withdrawing ₹50,000 per month, Rajesh would only be able to afford ₹43,000 per month, adjusted for inflation.
Continuing to spend ₹50,000 monthly would deplete his retirement corpus by the age of 80.
3. Tax Considerations
Taxes add another layer of complexity. While you might not pay taxes on an income of ₹3 Lakhs today, will the same be true in 25 years? It’s unlikely that an annual income of ₹12.5 Lakhs will remain tax-free.
Although future tax deductions are uncertain, taxes will definitely impact your retirement savings.
This highlights the importance of strategic asset allocation. Investing in tax-efficient instruments, such as Public Provident Fund or tax-free bonds or SWP, can help manage your tax liabilities.
However, there’s no guarantee that these will remain tax efficient in the future. Regardless of that it’s wise to focus on investments that offer tax-free income.
4. Longevity and Its Impact on Your Retirement Corpus
Have you considered the financial implications if you or your spouse lives past 90 years? How would you manage your finances in such a scenario?
Would you need to depend on your children for monthly expenses? With the trend of increasing life expectancy, this concern is very real and could significantly impact your retirement savings. In fact, outliving your expected lifespan could lead to the complete depletion of your retirement corpus.
Is there a solution to this potential issue? Absolutely!
When planning for retirement, it’s essential to not only save for your primary corpus but also to set aside additional funds for emergencies.
For example, by investing ₹10,000 per month, you could build an emergency fund of ₹1.5 Crores. This fund should remain untouched unless absolutely necessary, providing a financial cushion for unexpected situations.
4% Rule Of Thumb For Retirement
What Is The 4% Rule Of Thumb For Retirement?
The “4% rule” is a popular rule of thumb for retirement planning. It suggests that you can safely withdraw 4% of your retirement savings each year without running out of money over a 30-year retirement. Here’s a summary of the rule:
- Save 15% of Your Income: Aim to save 15% of your pre-tax income for retirement. This includes employer contributions, personal savings, and any other retirement accounts.
- Replace 70-80% of Pre-Retirement Income: Plan to have retirement savings that will allow you to replace 70-80% of your pre-retirement income to maintain a similar lifestyle.
- Withdraw 4% Annually: During retirement, withdraw 4% of your total retirement savings each year. This percentage is designed to provide steady income while preserving your savings over a typical 30-year retirement.
- Adjust for Inflation: Ensure your retirement savings and withdrawal strategy account for inflation to maintain your purchasing power throughout retirement.
Good Corpus for retirement
Determining a good corpus for retirement depends on various factors, including your lifestyle, expenses, inflation rate, life expectancy, and financial goals. Here are some steps to help you estimate a suitable retirement corpus,
- Estimate Your Monthly Expenses: Calculate your current monthly expenses and adjust for changes in retirement, such as healthcare, travel, or any hobbies you plan to pursue.
- Adjust for Inflation: Consider the impact of inflation on your future expenses. A common assumption is an average inflation rate of 6-7%.
- Estimate the Length of Retirement: Determine how many years you expect to be in retirement. For example, if you plan to retire at 60 and expect to live until 85, you need to plan for 25 years of retirement.
- Consider Healthcare Costs: Factor in potential healthcare costs, which tend to increase with age.
Takeaway
In preparing for retirement, it’s essential to look beyond simple savings goals and account for various factors that could impact your financial future.
A well-thought-out retirement plan should include comprehensive health insurance to protect against unforeseen medical expenses, ensure your investments generate returns that outpace inflation, and strategically manage taxes to preserve your wealth.
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