One thing that most of us want from life is a peaceful retirement at some point. For some, retiring at age 60 may be the norm while others may like the idea of an early retirement. Whatever your expectation may be, for your impending retirement, it is necessary to analyse the finances in the present, to plan for future investment. Retirement corpuses are gaining popularity among the masses as the level of financial literacy in the country rises. This method of investment ensures steady growth of capital with minimal market risks.
What is a retirement corpus?
A retirement corpus is a kind of investment fund built with the intention of saving money for the post-retirement period. The idea is to have enough money to sustain one’s current lifestyle, even after retirement. A certain amount of the monthly income is put into investments such as bonds, mutual funds or equities, which generate revenue or interest over time. An ideal corpus fund maximises profits on the amount while minimising the risks of market fluctuations, by diversifying the portfolio of the customer.
Factors to consider while calculating the retirement corpus
Every retirement plan looks different. The good part about planning your own retirement is that you can customise it per your individual needs and goals. The exact requirements after retirement differ for all investors. Yet, knowing exactly how much they need to save for a comfortable retirement is certainly helpful to plan further.
The following few factors must be estimated to accurately calculate your retirement corpus.
- The age at retirement
You get to choose. Generally, the 50s are considered an ideal age bar for retirement, but you do not have to subscribe to this. It could be any age to retire that seems most feasible for you. Though keep in mind that the earlier you choose to retire, the less time you’ll have to save for it.
- Expected monthly expense during retirement
Set a fixed expense per your estimated future needs. Remember to consider your lifestyle requirements in the present day and adjust them accordingly for your desired future lifestyle. While expenses keep fluctuating every month, it is good to keep a minimum limit on your needs to have an accurate prediction for your corpus. Consider factors such as the number of people who will live with you post-retirement, your spending habits, and savings for special occasions.
- Inflation rate - now and then
The most common mistake people make while calculating their retirement corpus is by not considering the inflation rates correctly. A minor estimation error in this regard may lead to miscalculations which could interfere with your retirement plans. The average inflation rate is about 6% but this may vary depending on your location and lifestyle. Inflation rates are usually higher in developing countries, although they also depend on certain unpredictable factors such as market demand, supply chain disruptions, recessions, and more. It is best to consult a financial advisor before you calculate your corpus.
- Risk appetite - now and then
Being young has certain benefits. You have the ability to tolerate greater risks and most people in their prime years choose to invest in high to moderate-risk assets to reap better financial rewards. However, as you get older, your risk tolerance changes. You must be clear on your rate of return during the post-retirement period, as well as in the present. It is advised to maintain a balanced investment portfolio with a high-risk share-to-bond ratio during the early years and then eventually shift to a low-risk ratio as you reach closer to retirement. The choice of investment is ultimately yours. Do consider your risk-taking capacities and return rate expectations, to reach a conclusion.
- Estimated life expectancy
This helps calculate the tenure of your post-retirement period. If you decide to retire at age 60 with a life expectancy of 85 years, you need to save for about 25 years, after you pause working. Keep in mind any health concerns you may develop in the later stages of your life. Glance your family history and genetics to make an accurate prediction. It is advised to consult health professionals on this.
- Withdrawal Rate during the retirement
Another common mistake while calculating a retirement corpus is underestimating your withdrawal rate. This is the percentage of the total corpus amount you will withdraw every month. If you have a high withdrawal rate, you hold the risk of running out of money in your lifetime. Experts suggest a 4-6% withdrawal rate as safe, while around 10% is considered a risky rate for withdrawal. Keep in mind the inflation during your post-retirement period as well.
Calculation
For example, you may require a retirement fund of Rs. 5.18 crore if your monthly expenses are Rs. 40,000 and you have 30 years until retirement. It is expected that inflation will be 6% during the period of accumulation and 5% during the phase after retirement. The scenario is predicated on a conservative 7% annual rate of return for the post-retirement portion of the retirement corpus.
Conclusion
It is advised to plan your retirement corpus by keeping several factors under consideration. Then, begin investing in the corpus as early as you can. A delay by a few years may lead to a significant loss in the final amount, and you may have to increase your per month instalments later, to cope with the premature loss. Presently, we have several automatic saving apps that spare you the hassle of calculating and keeping a record of your savings. Yet at the end of it all, your retirement is in your own hands.
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