The moot question faced by most people approaching retirement is how much money they will need for expenses in retirement, and whether they will have enough funds to last them for the entire lifetime.
To address this question, let us look at a few relevant issues. The first point is your estimated life expectancy. A very tricky question, since no one can correctly estimate how long he or she is going to survive.
Though, the average life expectancy in India is around 70 years, what if you live beyond that? Ideally, one should plan to live-off the returns on their capital till the age of 85, while leaving capital intact as an inheritance for their loved ones.
However, if they happen to survive beyond that age, they should have a backup plan in place, where they could dip into their capital to fund their retirement expenses beyond that.
This will enable them to have a reasonable retirement savings plan in place, which otherwise would have become a humungous task, if they planned for living-off returns, while preserving capital till they expire.
Also, you would need to take into consideration the post-retirement expenses you would incur, expressed as a percentage of pre-retirement expenses. Here, you may have heard or read somewhere that certain numbers would come down by 50 per cent to 70 per cent. However, these figures are not to be believed.
In fact, it's best if you work out the numbers yourself. The expenses that could possibly come down are on clothes and conveyance for work. However, there would be other costs that would go up. These would include:
In most cases, post-retirement expenses can easily be higher than pre-retirement because now you have time on hand. However, before you start worrying, there is a silver lining. This is because if you have made all the investment commitments till then, your regular inflows should ensure that you do not have earn extra to incur the expenses. Moreover, there could be some surplus at hand, if your endowment or money-back policies have matured.
However, you need to do some work yourself, to ensure that there is proper surplus management. Start by calculating the income flows from various sources in retirement, which could be annuities, pension, returns from investments, interest, rental income, and others.
Thereafter, make a retirement budget, which lists all the heads under which you incur expenses. Some expenses will be monthly, like your food and utility bills, while others may be at different intervals, like your medical insurance, holidays, etc.
Annualise all your incomes and expenses, and then divide them by 12 to get a monthly figure. The important thing is not to go overboard, either by being too frugal or too much of a spendthrift. A realistic budget is what you need.
In order to be in a good financial health, you may also have to reinvest part of your income every month to keep your capital growing.
Thereafter, the remainder should be allocated towards your monthly expenses. Ideally, there should be one account dedicated to investments and another for expenses. Yes, sometimes you could be surplus, but before spending it, remember that there would be deficit times as well.
Retirement is a period where you should not have to worry about how you are going to make ends meet. Rather, it's a period where you should be able to sit back and enjoy life. With a little bit of proper planning, you should be able to achieve just.
The writer is director, Touchstone Wealth Planners