I keep reading in various posts in Facebook groups and other blogs about how one simply needs crores in order to have any hopes of a comfortable retirement. Now, I am all for having more money as it does give you the ability and freedom to do things that you would like to do. At the same time, getting obsessed with some huge figures, worrying about the same and therefore not spending on the stuff that you need to spend today, does not really make sense for me.
How much do you really need for retirement? Well this depends on many factors, some of which like retirement duration, monthly expenses, likely inflation etc we are aware of. What we miss out is to understand how to spend our retirement. Let me make it simple – we can assume that a person retires at 55 and will live for the next 30 years. It can be divided as:
- First 10 years where he has a fairly active life and will continue to spend similar to his last monthly expenses.
- Next 10 years where his activities like travel etc get reduced and his medical expenses may increase.
- Final 10 years where medical and long term care costs may be high whereas other costs get reduced significantly.
Once you understand this division it will be easy to deploy the available money in a manner so as to take care of all 3 decades. Let us take a case of a person retiring today with the following asset base:-
- Own house in native place where they will be comfortable.
- Current expenses of 6 lacs a year.
- 40 lacs in PPF, 25 lacs in older tax free bonds, 35 lacs in FD
- 40 lacs in Equity MF and 20 lacs in stocks.
Now at first glance the portfolio does not seem adequate in any manner but let us take a closer look. He can plan as follows:-
- Interest from debt products will be 8 lacs per year. He can continue to use 6 lacs adjusted for inflation as his yearly consumption. Rest of the amount can keep shifting to PPF as interest there is tax free.
- In the second decade he can redeem part of the principal from his debt products and keep the equity still growing.
- By the third decade his equity assets would have grown significantly and will about 4.8 crores even with 10 % returns annually.
- His annual expenses will be about 28 lacs or so assuming 8 % inflation at the start of the third decade.
You can give it a name like bucket strategy etc but the fundamental mechanism is very simple. In the first decade try to spend out of the interest and dividends. In the second decade use the interest and principal redemption of your debt instruments. Finally, in the last decade use your equity assets to fund your regular as well as long term care needs.
In reality you can probably do with a lower amount of money too, but I will leave the readers to work it out on their own.