With more leisure time after retirement, most socialize and travel more. Hence, the travel cost of an individual goes up. Other recurring expenses such as daily commute will not come up every month, after retirement.
Even though starting early is the primary key to creating a retirement corpus, however, not properly thinking it through, and ending up with insufficient funds can also ruin all your hard work. A retirement corpus decides whether you will lead a comfortable retired life or not. Hence, it is a critical saving.
But how much will be enough for you? There is no one amount fixed, it differs from individual to individual, and depends on the stage of life one is in, one’s income and its growth, expenses and their growth, lifestyle, assets in hand, future liabilities, number of dependents, future goals, etc. It requires complex calculations. However, with proper assumptions and focusing on the goal, it is possible to achieve the desired reserve.
What happens to your finances after retirement?
For most, by the time they retire, various recurring expenses such as expenses relating to children along with those related to asset accumulation, get substantially lower, bringing down their monthly spending.
Having said that, some costs also go up such as travel and medical costs. With more leisure time after retirement, most socialize and travel more. Hence, the travel cost of an individual goes up. Other recurring expenses such as daily commute will not come up every month, after retirement.
After retirement, as the earning capacity goes down significantly or comes to a halt, the risk appetite to generate high returns for most also declines. This means the corpus that you will have accumulated by then has to be sufficient to generate a good, regular income even with safe and secure investments like bank FD, Senior Citizen Small Savings Scheme, Post Office Monthly Income Scheme or an annuity plan.
Add to that the inflation, which plays a crucial role in the calculation of retirement fund. The inflation that needs to be calculated is not only for the accumulation phase but also for the period after retirement. While calculating for your retirement you need to factor in the impact of inflation on different types of expenses in your retirement. For instance, general consumer inflation may be much lower than healthcare inflation.
What is right for you?
On the basis of your monthly income, and expense or on the basis of the desired retirement life, you can calculate the right retirement corpus. Also, while calculating the retirement corpus, keep in mind monthly expenses, as it is a critical factor for both fixed and discretionary expenses, which will change after adjusting for inflation.
There are also people who even after retirement have a greater risk appetite. This is, however, seen especially when there is an asset to fall back on for them. For them, they can segregate their corpus into the long and short term.
Also, avoid making the mistake of assuming a single rate of return on the entire corpus. It is better to break down the corpus into separate portions for different time periods. Experts suggest, longer time periods permit for higher risk allocation. Hence, the fund that you’ll need after 10-15 years after retirement can be put into instruments fetching higher returns. This way, the corpus will generate higher returns, and you will be able to achieve the monthly income requirements with a lesser retirement corpus.