scorecardresearchRetirement Planning: From inflation to eventfulness, numerous aspects of
Don't let longevity derail your retirement planning

Retirement Planning: From inflation to eventfulness, numerous aspects of life that manifest in your golden years

Updated: 09 Feb 2023, 08:00 AM IST
TL;DR.

Can longevity derail your retirement planning? Do you have sufficient money to take care of your old-age needs? Have you started planning for your retirement or are you still awaiting a nudge or a push to remind you that time is running out as you get older? Read further to know

“Live long and prosper” but first you must check if you have sufficient material means to live long or else you are doomed to be financially dependent on your friends and family. Ageing is another word for prolonged living wherein you can focus on your wrinkles only when you do not have to spend time arranging finances to meet your needs.

Being old and poor is a curse you can avoid by having a plan in place. Planning your retirement can be nauseating if you start late in life. However, paying early attention to how much money you would need when you retire can relieve you of the unwanted hassle. You can deal with your longevity only when you plan your “LIFE” well. It is never too late to get the ball rolling when it comes to retirement planning. If you are new to investing, you can always take cues from LIFE while planning your retirement.

Life, Longevity and Retirement

L” stands for both “Life” and “Longevity”, which means that we must plan our retirement in a way that our finances last as long as we do. To ensure that you continue to have enough money till the end, you must first estimate the future value of the money. You start by estimating your expenses now and then gauge their future value when you retire. 

For example, a 30-year-old man needs 30,000 every month to run his household expenses. After 30 years, he would need somewhere around 2,28,368 every month at an estimated seven per cent inflation rate. How much money he would need depends on how long he would live. Since there is no way you cannot estimate one’s life expectancy, deciding the retirement corpus can be a lot more tedious than you think.

One way to solve this problem is to start investing in long-term plans that promise an annuity or a pension as soon as you retire at the age of 60. This may include investing in pension plans or the government-sponsored National Pension Scheme (NPS). You must contribute to these plans regularly to accumulate a corpus. You receive the interest income on the corpus as a pension or you may choose to withdraw the entire accumulated corpus and then continue to withdraw some money from it regularly depending on your needs and lifestyle expenses.

Assuming that you wish to rely only on the NPS scheme to fund your retirement, you may start by investing 22000 every month as you turn 30 years old. The contributions must continue unbridled till you turn 60 years old. Your expected return on investment is 10 per cent and the expected annuity rate on the corpus accumulated is 6 per cent. To get a monthly pension of nearly 2,30,000, you must choose to purchase an annuity on more than 90 per cent of the pension corpus.

Monthly investment: 22,000

Total years of contribution: 30 years

Expected return on investment: 10%

Expected annuity rate: 6%

Portion of the pension corpus turned into annuity: 92%

Lump sum withdrawal on retirement: 40,11,613

Annuity value of the corpus: 4,61,33,545

Your expected monthly pension would be: 2,30,668

You may also park some money in a retirement fund that like any other mutual fund invests in a combination of myriad investment options including debt and equities. The returns may not be as great as in other equity funds though you can benefit from the magic of compounding if you invest in the fund consistently.

Assuming that you invest 15,000 every month for 30 years, the invested amount would be 54,00,000.

Name of the fund

SIP Investment 

(in Rs)

Investment Tenure 

(in years)

10-year returns 

(in %)

Invested amount 

(in Rs)

Estimated returns 

(in Rs)

The total value of the returns 

(in Rs)

Tata Retirement Savings Fund15,0003014.8454,00,0009,58,89,51110,12,89,511
SBI Retirement Benefit Fund15,000309.8454,00,0002,76,40,3213,30,40,321
UTI Retirement Benefit Pension Fund15,000309.7054,00,0002,66,69,4723,20,69,472
Source: MoneyControl

Alternatively, you may also put money in traditional deposits like the public provident fund (PPF) or other large-cap mutual funds that invest in the top blue-chip companies, thus, making them relatively stable compared to funds that park money in mid-cap and small-cap stocks or the thematic funds whose returns depend more on a particular sector performance.

Name of the investment 

SIP Investment 

(in Rs)

Investment Tenure 

(in years)

Return Rate

(in %)

Invested amount 

(in Rs)

Estimated returns 

(in Rs)

The total value of the returns 

(in Rs)

Public Provident Fund 12,500207.130,00,00036,30,22166,30,221
Mirae Asset Large Cap Fund12,5003016.3545,00,00011,59,88,22912,04,88,229
Nippon India Large Cap Fund12,5003014.9945,00,0008,29,18,0828,74,18,082
SBI Blue Chip Fund12,5003014.9945,00,0008,29,18,0828,74,18,082
ICICI Prudential Bluechip Fund12,5003014.6945,00,0007,70,07,3188,15,07,318
Source: MoneyControl

Inflation and its Impact

The money that you earn today would not be enough to sustain you tomorrow. The “I” for “Inflation” can cause a huge setback to your retirement savings if you are not careful. This means that you will have to pay more to meet your daily needs than what you are spending today, the reason being inflation and its impact that continues to reduce the value of our earnings with time. As the value of our wealth erodes with time, it becomes more pertinent to invest in a way that not only sustains your daily lifestyle but also leaves aside enough to meet sudden and unforeseen expenses.

To mitigate the effect of inflation, it is important that you pay more attention to your savings and investments and focus on stepping up your investments regularly to accumulate a large enough corpus to fund your retirement needs. Assuming that you step up your investments by 10 per cent every year, the total invested amount and value of your corpus would be starkly different in your mutual fund investments.

Name of the investment

SIP Investment

(in Rs)

Annual step-up 

(in %)

Investment Tenure 

(in years)

Return Rate

(in %)

Invested amount 

(in Rs)

Estimated returns 

(in Rs)

The total value of the returns 

(in Rs)

Mirae Asset Large Cap Fund12,500103016.352,46,74,10318,02,92,11320,49,66,216
Nippon India Large Cap Fund12,500103014.992,46,74,10313,98,90,78116,45,64,884
SBI Blue Chip Fund12,500103014.992,46,74,10313,98,90,78116,45,64,884
ICICI Prudential Bluechip Fund12,500103014.692,46,74,10313,22,56,38915,69,30,492
Tata Retirement Savings Fund12,500103014.842,46,74,10313,60,21,27216,06,95,376
SBI Retirement Benefit Fund12,50010309.842,46,74,1035,21,45,0517,68,19,155
UTI Retirement Benefit Pension Fund12,50010309.702,46,74,1035,07,00,5417,53,74,644
Source: MoneyControl

Fluctuation and resulting volatility

What does the current market situation say? It screams “F” for “Fluctuation”.

Sudden macro factors like the ongoing Russia-Ukraine war or the unforeseen Covid-19 pandemic have led the market to extreme downturns. Not that the market does not recover, but sharp market falls have caused many people to realize how they can lose out on their retirement corpus due to unexpected reasons. This inherent volatility that rocks the market every few years due to scams, war, epidemics or other reasons underlines the need to protect our retirement savings as much as spend time to earn and grow them with time.

Also, some investors feel so upset and devastated that they tend to withdraw their investments during a prolonged bearish phase not realizing the harm they are causing to their retirement portfolios. This is because withdrawals may force you to sell more of your investments while they are undervalued, thus, leaving behind less money to be invested when the market recovers.

One way to avoid the effect of this volatility can be to withdraw the money from your equity investments as soon as you reach your targeted corpus or somewhere near this amount. You can then reinvest the amount accumulated in less volatile investment opportunities like debt funds or the more traditional bank deposits including fixed and recurring deposits.

Eventful life

Imagine if life had been bland and uneventful. You would not have to plan for tomorrow. The sudden onslaught of “Events” in your life can leave you feeling “E … eerily” tensed.

There is always a “tomorrow” for which you must start planning “today”. Do not plan as if there is no “tomorrow” or “day after”. The most common events bugging one’s old age are unexpected health problems, subsequent healthcare and consequent palliative care. Though you may have a health insurance plan to fund your medical expenses, you must have enough to pay for out-of-pocket health care costs post-retirement. Healthcare costs are rising, thus, implying that you may have to pay more to pay for your medical treatment. Apart, there may be many facts and factors left ignored and undecided while planning your retirement savings and expenses. There is a need to be aware of what you must be “beware” of.

One way out of this is to ensure that your investments are diversified enough so that you do not start withdrawing your money from just one source. Being too conservative or aggressive will not help. The idea is to adopt a balanced approach while planning your retirement. If you are unsure of how to plan or how to go about your earnings and savings, it would serve best to seek professional advice. 

Apart, it would do a lot of good to not ignore traditional plans including savings cum insurance plans or critical illness policies that dole out a lump sum so that you may choose between treatment options at your convenience. Get rid of unwanted or prolonged debt so that the interest payment on your loan does not eat into your savings and earnings from investments. Also, keep enough emergency savings set aside and avoid making large retirement plan withdrawals, which can force you to pay higher taxes.

Economy and financial markets: A love-hate relationship
Economy and financial markets: A love-hate relationship
First Published: 09 Feb 2023, 08:00 AM IST