Thirty-five year old Ramratan Piramal would proudly tell his friends and colleagues that he had started saving for his retirement on a monthly basis. One day, a colleague stumped him: “Do you know how much you will need 20-25 years later?,” the colleague asked Piramal. This left Piramal speechless as there was no math behind his planning. He was saving with a simple goal that he should have some money on him post retirement.
However, it cannot be that simple. To begin with, it is important to know how much you plan to spend after retirement. Only then can you ascertain if the existing and future savings would be sufficient to support your post retirement lifestyle and needs.
Thumbrules suggest individuals spend close to 70-80 per cent of their expenditure while they were working, This thumbrule is widely accepted because in most cases, individuals have little idea about their existing spending pattern and so making future predictions is futile.
The thumbrule is supported by the fact that commitments like equated monthly instalments (EMIs), expenditure on children education and so on, would either be nil or negligible after you’ve retired. This may not always be the case as some get their children married after they’ve hung their boots. But some expenses might surely go down after retirement, while some others may increase.
With high inflation and standard of living also increasing, it won't be surprising if a retired spends as much (or more) than he / she did while he / she was working. With a lot more free time in hand, you are only likely to spend more and easily on travelling, eating out, movies and so on.
Individuals would definitely have a clearer picture of the expected expenditure in the last 5 -7 years of their work life, which can aid in making more meticulous calculations than relying on thumbrules. Making budgets will be helpful in having a better estimate of expenses after retirement.
There are many ways to arrive at a final sum. Some simple and easy steps you could make use of while planning for your retired life.
Your current expenses:
Using a budget to determine your existing spending pattern would be the best to start with. Some think budget only means cutting down expenses, but its not true. Budgeting is more to do with tracking expenses to know how much is spent and where, accordingly allocating for them or curtailing them.
A written budget, detailing the current monthly expenses, should be maintained for a minimum of six months to help in averaging it out.
This period will also help capture less frequent expenditures, like car, furniture repairs, setting aside for guests and relatives, etc, which might otherwise get missed out.
Be honest with your budget exercise.
Likely changes in expenses:
Many make significant changes in expenses post retirement. For instance, individuals staying in company-provided house would need to move in to their own homes or rented place, which would imply an outgo on rental / home maintenance. A detailed estimate of the financial impact of such decisions has to be worked out.
Also, keep a track of expenses that may end with your retirement like EMIs on home loans, car loans. In fact, it would be prudent to plan financial affairs in order to have these expenses terminated at the time of retirement.
It is painful to carry over any liabilities to the post retirement life.
Expenses that may decrease:
A lot of work-related expenses like travel to and fro from office, meal at work, office-wear would immediately drop on retiring. A quick relook at the written budget, as worked out above, should help in identifying many other direct and indirect heads of expenditure that can be safely knocked off the budget.
Expenses that may increase:
Healthcare associated costs typically would have to be factored in. Not to forget that preventive costs and check-ups would also become dearer. This factor is especially important for those who are not covered under medical insurance plans by their employers post retirement.
Traveling expenses is yet another head that tends to rise, mostly if the company was refunding it. So would be the cost of a driver. With free time in hand, individuals may want to catch up with relatives and old friends at distant places, or even meet children settled in another city. This would add to the monthly bill.
Charity or any other social causes may be another enabling factor. If the individual would be settling in a different city post retirement, then the difference in cost of living needs to be factored in.
Hobbies and leisure activities:
Most hobbies entail additional expenditure. Like traveling or photography, movies, for example might not come cheap to your pockets. Club memberships (company sponsored) which the individual might want to retain would now add up to own costs. Making optimistic provisions for these expenses would only help.
Provide for uncertainty:
Despite the best intentions, you are most likely to find that actual expenditure patterns post retirement may never match with the budgets to the tee. Home repairs, car repairs or providing for children for an extended period or sudden illness are events that can never be anticipated.
In such circumstances, you will have to be smart and ensure that finances are properly rejigged.
The fact that certain expenses are unpredictable also underscores the importance of reviewing budgets every year when the countdown to retirement begins. The retired would do well for themselves if they maintain the discipline of budgets even beyond retirement.
Although this method would entail a lot of efforts from individuals, it would nevertheless be immensely useful in securing financial independence during ones second innings.
The writer is a certified financial planner