Factors To Keep In Mind For Your Retirement Corpus

‘Life begins at retirement’. How true!

In the old days, people spent all their working years waiting to retire at sixty, so that they could do what they always wanted to. In today’s times, thanks to the high stress lifestyle, people are looking for an ‘early retirement’ at age forty-five or fifty, tops. They want to enjoy life after that.

But what is even more stressful is the answer to the question – Do I have enough (money to live out my retired years)? Most people do not bother about this fact and are more concerned over other goals related to their children; those of you who have thought about this have never got down to calculating this number. And those that have tried to compute this number make it more of a thumb-rule guess and a miniscule number among them, actually take into account inflation. To cut a long story short, retirement corpus is hardly ever a properly computed figure.

Let us look at some important factors and their effect on the nest egg.

I. Not computing your current expenses correctly: This is the first step in the computation of the retirement corpus. If this is erroneous, so will be the end result. Hence, you could end with a corpus which is insufficient and runs short well before. This need not be in detail (though it is better if it is), but at least a broad outline under major heads should be computed.

II. Not accounting for inflation: Most of us forget that inflation is a ‘silent killer’. Due to inflation, the value of money goes down with each passing year. Also while computing expenses for the future, the amount needs to be inflated at an appropriate rate to get the exact number required. This is crucial especially in a country like ours, where food inflation especially, is running high. Hence, the amount required to meet one’s daily needs is going to continuously move northwards.

III. Overdrawing from your corpus: Once retired, one needs to adjust one’s lifestyle. Compulsive spending should be a strict no-no. Overdrawing in the initial years can lead to a shortfall in your corpus in the later years. Since this is a time when there is no earning it would be wise to make out a monthly budget and live within that, to avoid hardship in one’s penultimate years.

IV. No reserves kept aside for health-care: All computations done for determining your retirement nest egg are done without including health-care expenses. So it is essential to have a corpus / cover to take care of your medical expenses. With medical costs rising at almost 15-20 per cent per annum, these can take away a large chunk of your retirement corpus if you have not created funds for this separately.

V. Not accounting for growth in your corpus: It is a general belief that your entire retirement corpus should be put into fixed deposits or small savings schemes like Senior Citizens Savings Scheme or Post Office Monthly Income Scheme to secure the same. Sure, security of the corpus is important, but on the same hand growth is crucial too. Hence, even after retirement, a small portion of the corpus should be invested in asset classes which will provide growth – equity or equity based products. It is important even in one’s golden years to beat inflation and continuously grow the retirement corpus.

VI. Underestimating your lifespan: Most 30-something youngsters, when they think of creating a retirement corpus, do not think beyond 10-15 years of retired life. What they forget is that lifespans are getting longer thanks to advancement in medical science. Today, the retired lifespan has shot up to 25-30 years. This is approximately equal to your working lifespan. Further, this is a spending phase when there will be no earning. Hence it is vital to create a sufficient corpus which will last you for at least till age 85-90.

What is clear is that utmost care must be taken of the mentioned factors, while accumulating one’s retirement corpus. This is a goal which is common across the board for each and every person – rich or poor and is possibly the most ignored. Utmost care must be taken during the accumulation phase, firstly to ensure that a sufficient corpus is being created and then during the utilisation / distribution phase that it still continues to grow at a reasonable pace to last the investor’s lifespan.

This is a Guest Post by Manish Jain – he is a certified Financial Planner & member of The Financial Planners’ Guild, India. FPGI is an association of Practicing Financial Planners to promote professional excellence and ensure high quality practice standards.