In the first part of this series on Financial Freedom, MintGenie gave you a simple guide on how to reach financial freedom in India.
The most important goal in financial planning is the retirement goal. You might ask why? It’s the most important because your active income stops completely but your living expenses do not. You have to depend on the corpus you have accumulated to generate enough income. You cannot depend on lenders because there is no concept of a retirement loan and you may not want to go for a reverse mortgage because of the taboo attached in India.
Traditionally retirement has meant hanging up your boots between the ages of 55 to 65. Off late, a new trend is taking shape where the younger generation wants to retire early. When they say that they want to retire early, what they mean is that they want to be financially free much earlier than the traditional age of retirement. They want to have enough money to focus on doing what they enjoy. They want to be their own boss.
Plan the retirement
You may be wondering how much one would need to retire early? Easiest way is to estimate depending on the below thumb rule.
The simplest method you can use to figure out the amount is to multiply your annual expenses with the number of years you expect to live. This assumes that the returns on your corpus will be equivalent to the rate of inflation, the multiple will come down as you increase the allocation to risky asset classes.
If someone wants to calculate it mathematically and do not want to rely on thumb rule, following assumptions need to be made:
- Inflation - Take an inflation rate between 5% to 7% depending on your lifestyle. If you want to be conservative assume it at 7% only. These numbers have been assumed based on current CPI.
- Annual expenses - You must ascertain the total amount of money you will spend once you are retired and have no active income. This will depend on where you are going to stay (costs in Bikaner/Ranchi Vs. Costs in Delhi/Mumbai) and other factors like expenses on traveling (do you want to travel internationally or domestically, by train or by business class), dining, leisure, health care, child education (if you are retiring early, additional cost for kids’ education) among other things.
- Life expectancy - With improving health care, life spans are increasing and it would be prudent to have a higher life expectancy. One must take a higher life span ideally. You can take an estimated lifespan of 80-100 years depending on your risk appetite.
- Targeted date of retirement - This will help you figure out the number of years you will probably live after retiring and the amount of time needed to reach the goal.
- Tax efficiency of the instruments used for accumulating the corpus and expected returns.
- Return expectations in the withdrawal stage (these returns may be lower than the accumulation stage, as you move from riskier asset class to less risky asset class).
These assumptions need to be reviewed every year in the accumulation stage. Once you have figured out these assumptions, it’s easier to take these inputs to any online retirement calculator to make an exact estimate of your retirement corpus.
The above details focus on the quantitative aspects of retirement. Following are the things which you must focus apart from money to enjoy your retirement:
- Good health – With all the money and financial freedom, the most important thing you need is good health to enjoy the time and money. So, in the pursuit of early retirement don’t stress your mind and body to an extent that it breaks down in later parts of the life.
- Purpose and passion - Retirement (or early retirement), sounds exciting, but trust me it is equally boring as well. You need to figure out how to utilize all the spare time.
- Last but not the least, you need a decent health insurance to protect your corpus from an uncertain expenditure. In old age, chances of falling sick are high. You need to plan for health insurance when you are young. Don’t be dependent on corporate health cover till retirement as you may become uninsurable in later stages of life due to any illness. It would be prudent that you take a personal health cover which you can continue forever.
Remember: Retirement planning is less about maths and more about subjectivity in assumptions.
Nishant Batra CWM® is Chief Goal Planner of Holistic Prime Wealth.
Disclaimer: The views expressed in this article are of the author, not MintGenie.
To read the entire series on Financial Freedom, click here.