By Anup Bansal
While planning for retirement, you do not want to outlive your retirement nest. A realistic estimate of your lifespan goes a long way in ensuring your retirement plans are in good shape.
While life expectancy in India is about 70 years, there are chances that those with better access to medicines, technology and healthcare facilities, would live longer. If you are in your forties today, by the time of retirement (assuming 60 years), life expectancy is likely to improve further. So, there is a need to look beyond average life expectancy while planning for retirement.
Prepare for the worst
However, it is not just lifespan, but multiple factors such as inflation, post-tax portfolio returns, years in retirement and expenses that affect retirement planning. Suppose an individual retires in 20 years and has current household expenses of `six lakh a year. At about 6% annual inflation, monthly expenses at the time of retirement would be `20 lakh annually.
The thumb rule is that the retirement corpus should be at least 25 times of the annual expenses at the time of retirement. By that logic, this individual would need to build a retirement nest of at least `5 crore in two decades.
For the sake of simplicity, let us consider that all the assumptions (for the above-mentioned factors) are in sync with reality. In this case, the investor should be able to preserve a kitty for 25-30 years, assuming 6% annual returns on a post-retirement portfolio. But, seldom do expectations match with reality.
What if post-retirement, inflation figures go for a toss?
We assumed that `1 today becomes `3.3 (3.3 times) in 20 years, given an annual inflation rate of 6%. However, if the inflation rate is higher at 7%, then it would become `3.9, at 8%, `4.7 and at 9% inflation, it would be `5.6.
If we assume an 8% scenario, your corpus will last for 25 years (five years lesser) and in the case of 9%, it will last only 23 years (seven years lesser). However, if it remains at 6% as expected, then your portfolio will last for 30 years. Thus, a single variable (like inflation), can alter the life of your retirement nest by about seven years.
Need for growth
Then, there is the challenge of portfolio returns being lesser than expectations. Or a tax law, reducing its post-tax returns. In the post-retirement asset allocation plan, the role of equities is crucial. If you decide to invest all in debt, the returns could be about 4% per annum. The above calculations are based on the above assumption of an all-debt portfolio.
However, if you are adding an element of equities into the portfolio, portfolio returns will improve (6% annually) and thereby increase the life of the retirement corpus. If we consider that the annual inflation is averaged at 8% post-retirement, the regular all-debt portfolio would last 25 years whereas having about 50% of assets in equities can increase the lifespan of the retirement corpus up to 31 years.
By investing in growth assets, such as equities, you not only stand a better chance of beating inflation but also in the process increase the chances of your retirement nest egg keeping pace with your lifespan.
It is better to be safe than sorry. Plan for at least 25-30 years of post-retirement income to live a long and stress-free retired life.
The writer is chief business officer, Scripbox
OLD-AGE PLANNING
– Inflation, post-tax portfolio returns, years in retirement and expenses together affect retirement planning
– Retirement corpus should be at least 25 times of the annual expenses at the time of retirement