Are you ready for retirement? Key things to consider

The changing socioeconomic structure of the country has increased the importance of retirement planning. Many Indians neither have the social safety net of joint families, nor do majority of them work in government organizations that provide pensions post retirement. The new dynamics of nuclear family, lack of social security and an inflation-driven economy have made retirement planning important.

The golden rule: Start early
The major problem most of the individuals face is the prioritization for retirement planning. People often fail to realize (or act) the fact that the earlier they start, more the benefits. Procrastination often leads to higher investment requirement which becomes an uphill task at later stages. For example, at 10 per cent RoR, a 25-year-old person investing Rs 4,000 per month would retire with a corpus of Rs. 1.5 crore at the age of 60. On the other hand, a 35-year-old person investing Rs 8,000 per cent would only make Rs 1 crore at retirement.

This can be mainly attributed to the confusion they face regarding the product they need to opt for retirement planning and also the miscalculation on the part of retirement fund requirements (when to start, how much to save etc.). The miscalculations without considering the provident fund and suitable expected inflation rates leads to enormously high amount of required retirement corpus.

Things to consider
The key factors that investors should keep in mind while planning and investing for their retirement are:

• The amount of provident fund accumulated till date
• The expected amount of future contribution to the provident fund
• Expected inflation rate during the post-retirement period. This is also referred to as the time value of money
• Realistic retirement corpus required should be calculated by excluding the expenses which might not be incurred after the retirement
• Medical inflation rates for the past decade have remained high (approximately 20 per cent). Considering the fact that for most of us the medical requirements are proportional to age, it is important to consider medical inflation rates in determining the required corpus.
• Selection of appropriate and suitable investment instruments from the gamut of products available in the market

How to calculate the required corpus for retirement:
While assessing the amount to be accumulated as retirement corpus, it is important to consider the provident fund contribution made till date and the expected future contribution. Ignoring these two factors leads to disproportionately high retirement requirements. In order to counter this it is advisable to adapt the following approach:

• Retirement fund shortage = Total fund required minus accumulated provident fund
• Yearly amount to be saved = Retirement fund shortage divided by years to retirement
• Monthly investment for retirement planning = Yearly amount to be saved divided by 12
• Actual investment to be made = Monthly investment minus monthly provident fund contribution

Nitin Vyakaranam is the founder and chief executive officer, ArthaYantra, an integrated online personal finance company.

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