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When is the right time to start planning for retirement?

Kevin 29 years, a client servicing executive working with an Ad agency has been living in Delhi for the last 8 years. His dreams have come true as he bought a car 2 years back and is now planning to buy an apartment next year using the bonus that he will be getting. He and his wife go for one holiday outside India every year coupled with 2-3 domestic holidays. He had taken a personal loan for his wedding.

Majority of his monthly earnings go towards monthly living expenses, EMI for car loan& personal loan, credit card bills and occasional partying. For the purpose of tax savings, he has bought life insurance policies and a health insurance plan. The only form of savings for the specific purpose of retirement is done through EPF. But while switching jobs, he has withdrawn the EPF accumulated during the previous stint to pay up for the down payment of the car and rental advance for the house he is living in.

He chooses to withdraw from EPF, citing the reason as "I have a long way to go for retirement, let me utilize this fund for something more important now".

This is what most of us choose to do. PF corpus, which is meant for retirement is withdrawn for various reasons like buying a primary house, clearing up credit card/ personal loan dues, foreign travel, buying car etc. The strong belief is, “I’m young and I have a long way to go for retirement. Let me plan for it when I start earning more”

This brings us to the most important question, “When is the right time to start planning for retirement?”

While we keep postponing the plan for retirement, what we tend to ignore is inflation. As discussed in the previous topic, the average inflation(WPI) over the last 35 years in India has been 7.57%. But our lifestyle inflation that includes education, entertainment, travel, electronic gadgets etc. is believed to be far higher. Keeping this in mind, it is wise for us to infer that when we retire, we will need a much bigger corpus to sustain the same standard of living and yet cope with inflation.

If you are spending Rs. 30,000/- when you are 30 years old……..when you turn 60, you would need Rs. 172,000/- to maintain the same standard of living @ 6% inflation.

To manage a retirement life of 25 years with out any income, you would approximately need Rs 3.72 crs when you turn 60 years.

Impact of Inflation on our future expenditure at the time of retirement (Amount in INR)

 

Person Aged 30yrs

Person Aged 40yrs

Person Aged 50yrs

Current Monthly Expenses

30,000

45,000

60,000

Expenses at Retirement age (60 years)

1,72,000

1,45,000

1,07,000

 (Inflation rate assumed @ 6% p.a.)

Illustration disclaimer: The above example is only for illustration purposes & shall not be construed as indicative yields/returns of any of the Schemes of Canara Robeco Mutual Fund.

Once an individual retires, the corpus accumulated for the purpose of retirement needs to be invested in a place where it generates regular income on a monthly basis. The objective of such an investment corpus is very clear - regular income generation and capital protection.

Withdrawal for 25 years starting at the age of 60 years (withdrawal for 300 months, Amount in INR)

 

Person Aged 30yrs

Person Aged 40yrs

Person Aged 50yrs

Monthly Expenses at Retirement age (60)

1,72,000

1,45,000

1,07,000

Post Retirement investments return

Investment option yielding 9% returns p.a.

Inflation

Inflation rate assumed 6% p.a.

Corpus Required at Retirement

Rs. 3.72 Cr

Rs. 3.12 Cr

Rs. 2.32 Cr

Illustration disclaimer: The above example is only for illustration purposes & shall not be construed as indicative yields/returns of any of the Schemes of Canara Robeco Mutual Fund.

For an individual who is 50 years old, target to accumulate 2.32 Crores in 10 years is quite an uphill task, if he doesn’t have existing corpus already built up. For a person who is 30 years old, building a corpus of 3.72 crores over 30 years shouldn’t be too difficult provided he is a disciplined investor and invests regularly.

 

Person Aged 30yrs

Person Aged 40yrs

Person Aged 50yrs

Corpus Required at Retirement

Rs. 3.72 Cr

Rs. 2.08 Cr

Rs. 1.16 Cr

Existing Corpus

3,00,000

5,00,000

7,00,000

SIP required to accumulate the corpus (returns @ 12%)

9,262

17,537

42,546

llustration disclaimer: The above example is only for illustration purposes & shall not be construed as indicative yields/returns of any of the Schemes of Canara Robeco Mutual Fund.

The day first salary/income is earned by an individual is the day one should start saving up for retirement. The corpus earmarked for retirement (likes of PF, PPF etc.) shouldn’t be withdrawn prematurely and should be utilized only for the purpose of building a retirement corpus.

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