What is your target figure for your retirement corpus? There is no dearth of the indicative targets, ready-made computation calculators, spread sheets, etc. But what is the right amount for you to save, keeping in mind your own risk return characteristics and circumstances, is the most important question. Let us discuss the same in detail.
Often, you may be looking for an active post-retirement life. It could range from travelling to different parts of the world, ticking off your bucket list, or in general doing all the activities that you have deferred during your busy working years. In such cases, one needs to adjust the savings target higher. General rule of thumb is ranging from targeting 70% of pre-tax income should be closer to 90% for you.
This is a very important element and often people do not account for it properly. Most of us expect to be healthy when we retire, but what happens in reality is just opposite. Either you or your spouse has a major health issue that will need to be managed for the rest of your lives; adjust your savings accordingly and target a higher corpus. Have adequate amount of health insurance for any unexpected illness. It is always good to maintain your health. For instance, if you are overweight, have a sedentary lifestyle, have unhealthy habits such as smoking, you should adjust your target much higher.
One may or may not be married or may have children who have moved out owing to their own professions. Whatever may be the case, one should plan accordingly. Your spouse may be younger than you and your life expectancy also may be significantly longer than your spouse. In that case, targeting a higher balance is probably a good idea as you may need to hire people to help you or incur in-home care or assisted living expenses as you age. Accordingly adjust your savings.
Most people who are close to retirement believe that they will need less money than they are earning now when they retire. Most are much more comfortable targeting a replacement ratio of 100% of their final annual earnings. Their feeling is that if they fall short, they still will have enough money to do what they want which may not be a logical assumption. It is essential to have an optimum amount of corpus, it should not be excess or short.
Empirical studies have shown that working with an investment adviser always yield better results. Instead of doing your own financial planning and asset allocation, if you work with an investment adviser it is more likely that you will achieve your savings and investment goals. So far, if you have not worked with an investment advisor consider doing so. Working with an investment adviser generally adds significant returns each year to your portfolio.
To conclude, there is no one-size-fits-all answer to the question. Consider all the above points while embarking on the corpus building process.
(The writer is a professor of finance & accounting, IIM Tiruchirappalli)