Some of the readers have written to me saying that the post on the retirement calculation process was good but it could have done with an example. I had actually wanted to do that in the next post, so here it is. Note that though the names are fictitious as always, the family in question is well known to me.
Rajiv and Neha are in their late Forties and both are working. They have 2 sons Ajay and Sanjay, both in college now and will be completing their graduation in 2 and 4 years respectively. The couple want to retire in about 8 years time and wanted to understand their retirement expenses. I encouraged them to follow the process.
Step 1: Understand your current expense heads and the amounts you spend on these &
Step 2: Take out the expenses that you will most likely not have in retirement
- Current annual expenses of the couple is close to 20 lacs.
- However on closer examination they were able to identify the % expenses on some of the heads that they are unlikely to need in retirement. These were Children’s college expenses ( 30 % ), Children’s other expenses ( 5 % ), rent for apartment ( 15 % ), Life insurance ( 3 % ), Second car expenses ( 5 % ).
- So 58 % of the expenses will not be required in retirement. Note that the couple plan to move to their own home in their native city on retirement.
- Their expenses annually at retirement in current prices will therefore be 8.4 lacs.
- Further, they had been to a vacation in Europe costing them 4 lacs in last year. While they do plan to go on vacations, the amount spent will probably be close to 2 lacs in today’s prices.
- This brings down the cost to 6.4 lacs in current prices.
Step 3: Outline the kind of life you want to live in retirement
Step 4: Adjust expenses arrived at in Step 2 with the changed life situation in Step 3
Step 5: Add new expense heads based on your projected retired state in step 3
- The couple want to engage in seeing more of India and meeting their relatives which they were unable to do during their career years. The estimated travel costs in today’s prices are about 1 lac per year.
- They want to become members in a club as both of them are fond of playing Bridge. Fortunately the club is not too expensive and will probably cost them 1 lac annually.
- Medicine and Doctor’s consultation is estimated to be about 60,000 per year.
- Expenses at retirement in current prices will therefore be 9 lacs per year.
Step 6: Project your expenses in the first year of retirement
- For the sake of simplicity we will assume a flat inflation rate of 8 %.
- Assuming the couple want to retire at 55, they have 8 years left.
- Annual expenses in the first year of retirement will be 16.66 lacs.
- Corpus needed for 30 years at zero real rate of return will therefore be about 5 crores.
Assuming they live beyond 85 they will need to plan for long term care and assistance which will need more funds than this. In general one can easily end up spending double the usual amount for this purpose. If they assume 10 years of this then it will be good to budget another 2 crores corpus by the time they start retirement at 55.
Now, many of you may be thinking if it will be possible to have 7 crores for them by the time they retire. I clearly do not have it but I still consider myself financially independent. Why so? Because, you can look at your corpus innovatively by intelligent use of the 3 portfolio strategy.
In the next post I will explain this in an elaborate manner.
Interested readers may pls follow my blog on email by clicking on the relevant button on the right hand panel. I will shortly be stopping the practice of posting the links in different Facebook groups. Following the blog will ensure you get intimated whenever there is a new post.