At the age of 53 years, when most people start thinking about planning for retirement, Pankaj Kumar quit his banking job and professional life for good. Over the next one year he indulged in his passion – travel and trekking. Kumar travelled across north India, visiting places, which he had always wanted to, but could not due to work and family responsibilities.
Today at the age of 58, nearly five years after retirement, Pankaj has covered a lot of places and is planning to travel more in the days to come. When asked 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.
Gopal Rao’s case is exactly the opposite that of Kumar’s. Having retired from private service at the age of 58 years, Rao utilised most of his provident fund corpus for the lavish weddings of his two children. He is now left with only Rs 10 lakh, which he has invested in a bank fixed deposit at 9 per cent interest, which earns him only Rs 7,500 per month. With the present level of inflation hovering at around 9 per cent. it is a challenge for Rao to manage his expenses with this money.
Of the two cases mentioned above, Kumar definitely seems to be better placed. He is living a dignified life, having planned adequately for his retirement expenses. Let us look into the steps he took to retire early.
Start investing early: The moment, Kumar got his first salary at the age of 21 years; he opened a Public Provident Fund (PPF) account and starting investing 10 per cent of his salary in it every month. He knew that if he kept surplus money in his bank account he would spend most of it. So, he saved first and then spent whatever remained for 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 (PF) is like a blessing in disguise as a fixed amount (usually 12 per cent of your basic) gets deducted from your salary along with an equal contribution from your employer. This contribution increases as and when your basic salary increases. It earns you compounding returns of 8.5 per cent.
Just to give an idea, if the basic salary of an individual at 21 years is Rs 10,000 per month and he is expected to retire at age 58 years with a modest 5 per cent annual increase in his basic salary, he would be able to create a PF corpus of Rs 1.42 crore.
Plan your retirement age in advance: Kumar had his family responsibilities, but since he had planned all of them in advance he was able 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 how much your expenses will be at the time of retirement. For this, the present expenses can be considered as the base. 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 25,000, then at the present inflation rate of 8 per cent, the future value of this expense at age 58 will be Rs 1,47,000. Then if one is expected to survive (life expectancy) till age 80 years, assuming that you can earn 9 per cent returns on your retirement funds and the inflation that time to be 7 per cent, you will require a corpus of Rs 3.17 crore.
Investing in equity: Understanding the power of equity over longer period of investment helped Kumar to create wealth over a 20-year period. He started investing in equities 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 him with an annualised return of around 16 per cent over the 20-year period and helped him retire early. Today, he retains around 25 per cent of his corpus in stocks and enjoys a regular stream of tax-free dividend income, which is an additional source of income. 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 begin to haunt those who do not have any activity planned after retirement. One way out would be to develop your hobbies in your younger days or plan activities which can keep you busy such as teaching, part time consultancy, and so on. Not only will these keep you active - mentally and physically, they can also provide you with a source of additional income.
The writer is Chief Planner, Proficient Financial Planners