Plan for a Dignified Retirement Life
At the age of 53 years, when most people of that age start thinking about planning for retirement, Mr. Pankaj Kumar quit his job and banking career for good. Over the next 1 year he indulged in his passion – Travel and trekking as he travelled across north India, visiting places which he had always contemplated but could not do so earlier due to his job and family responsibilities. Today at the age of 58, nearly 5 years after retirement, Pankaj has covered a lot of places and is still planning for more in the days to come. On being quizzed about how he is able to manage his routine and travel expenses, Pankaj casually mentions that he has planned for his retirement in advance and has created adequate income streams to fund his retirement.
Mr.Rao’s case is exactly the opposite that of Pankaj’s. Having retired from private service at the age of 58 years, Mr. Rao utilized most of his provident fund corpus for the lavish wedding of his 2 children. He is now left with only Rs. 10 lakhs which he has invested in a bank fixed deposit at 9% interest, fetching him only Rs. 7500 per month to take care of basic needs. With the present level of inflation hovering around 9% it’s a challenge for Mr. Rao to manage his expenses within Rs.7500.
From the above 2 cases, I am sure all of us would like to emulate Pankaj Kumar who is living a dignified life, having planned adequately for his retirement expenses. Let us introspect on the following things which Pankaj did to retire early.
Start investing early: The moment, he got his first salary at the age of 21 years; he opened a PPF account and starting investing 10% of his salary in it every month. Being aware of the fact that if he maintained surplus money in his bank account he would spend most of it, he decided to save first and then spend whatever remained towards his basic needs and requirements. He initially opted for bank recurring deposits and postal schemes.
PF should be exclusively for your retirement: For the salaried, Provident fund is like a blessing in disguise as a fixed amount (usually 12% of your basic) gets deducted from your salary along with an equal contribution from your employer. This contribution increases along with an increase in your basic salary and earns you compounding returns of 8.5%. Just to give you an idea, if the basic salary of an individual at 21 years is Rs. 10000 per month and he is expected to retire at age 58 years with a modest 5% annual increase in his basic salary, he would be able to create a PF corpus of Rs. 1.42 crores.
Plan your retirement age in advance: Pankaj had his family responsibilities but he planned all of them in advance which helped him to focus on each of them. Having clear goals helped him to start allocating funds to his various goals.
Calculating the retirement corpus: Once you have decided to retire at a particular age, the next thing to do is to find out what will be your expenses at retirement. For this the present expenses can be considered as the base and after deducting children’s educational expenses and other financial liabilities the future value should be calculated at an appropriate inflation rate. For example if the basic monthly expenses at age 35 is Rs. 25000, then at the present inflation rate of 8%, the future value of this expense at age 58 will be Rs. 147000. Then if one is expected to survive (life expectancy) till age 80 years, then assuming that you can earn 9% returns on your retirement funds and the inflation that time will be 7%, you will require a corpus of 3.17 crores.
Investing in Equity: Understanding the power of equity over longer period of investment helped Pankaj to create wealth over a 20 year period. He started investing in equities in the 90’s and slowly and gradually built a portfolio only of bluechip and large companies. He followed a strategy of identifying the top 20 companies of the sensex and kept investing a small amount every month irrespective of the market situation. These investments provided Pankaj with an annualized return of around 16% over the 20 year period and helped him retire early. Today he retains around 25% of his corpus in stocks and enjoys a regular stream of tax free dividend income which is another source of income for him. Fixed deposits and PPF provide stability but are not enough to beat inflation.
Planning activities post retirement: After leading an active life for more than 25 years before retirement, it is difficult to suddenly find yourself without work. After a few days of retirement, the inactivity and loneliness will come to haunt those who do not have any activity planned after retirement. It is therefore suggested to develop your hobbies in your younger days or plan activities which can keep you busy such as teaching, part time consultancy, etc.
Don’t let your retirement turn into a curse. With a little bit of planning and starting early, you can life a dignified life even at retirement.
Steven Fernandes, Certified Financial Planner
Chief Planner, Proficient Financial Planners.