Retirement of the Earlier Generation:
In 1990, life expectancy in our country was at 58 years, while the retirement age was between 55 – 60 yrs in various state and central government jobs. Many people died before they retired. We had movies on withdrawal symptoms after retirement and how the erstwhile who’s who coped up with inactivity and lack of importance. Since that generation had steady pension and a huge Provident Fund, usually financial trouble was not one of the problems they faced post retirement. This was despite being predominantly a single income family with several dependents.
Generation X: The Retirement Dream
Current Life Expectancy of India is around 70 yrs. The official retirement is still between 55 – 60 years. The private sectors are fairly new with predominantly young people. They have not faced retirement issues yet.
Our world looks vastly different from that of the previous generation. Most of us do not have any pension plans as part of our employment contract. Many startups and even mid size companies do not even provide Provident Fund to their employees. This has been compensated to a great extent by a significant increase in the individual earnings, dual income from both spouses and single child. However, many habits have also changed in between. We have forgone the age old habits of saving, and many tend to spend most of what they earn and more encouraged by huge credit limits in the credit card. To be fair, expenses of education and health care has increased significantly too.
The Early Retirement Dream:
We also have retirement goals/dreams such as retire by 40 and live by the beach shack. This dream has been kindled by numerous internet based business which are truly location independent and several new opportunities that the changing inter connected world has given us.
A Million Dollar Question?
But how do we know that we are ready to retire? How do I know if I have enough to quit my job and try out the risky start up idea that I had always dreamed of ? Am I ready (financially) to slow down and move to my the mountains for a quite life and still be able to live a good life? Can I afford to move onto my spiritual life and be sure that my duties will still be completed through my built in corpus. What is the retirement goal we must aspire for?
I’m going to try to put a template that you can use for arriving at your retirement number.
Ongoing Expenses:
Is your lifestyle going to be significantly different from what you have today or will you be living in the same urban city one you retire? Many plan to go back to their home town and live a simpler life and that can significantly reduce your expenses. Or you may love your city life and want to spend more time in the country club and world tour. Try to arrive at a reasonable estimate of this if it is vastly different from your current lifestyle. You may even take a mini retirement and make sure that you indeed love the lifestyle you aspire for and will not die of boredom and lethargy. If it is similar to your current lifestyle, consider your current expenses and add any additional expenses you intend to indulge in during your retirement.
Ongoing Income:
Retirement need not mean a complete stop to your active income. Many take up part time jobs as lecturers in college, freelance trainers to keep up to date with their field and keep themselves busy. This can be a source of steady income to keep up with the everyday expenses.
There are also passive incomes such as interest from deposits, dividend income, Royalty and pension payouts that add a significant chunk on a monthly/quarterly/annual basis.
One time Expenses:
No one wants to retire to sulk in a corner. Many of us want to retire so that we can travel the world or do things that we never had time for in our busy corporate lives. While some of them like organic farming or a bed and breakfast can bring you a good income source, some hobbies such as travelling the world and taking cruises can be very expensive.
Contingency Expenses:
If you have dependents, who are dependent on your active income, a life insurance cover that covers your desired retirement corpus is a must. If you do not have health cover at work, or will not be able to continue getting the same corporate plan after retirement, shop around for a good health insurance policy. My individual health insurance policies are notorious for dismissing valid claims. So do not buy any policy that is the cheapest. Look for metrics that showcase whether the vendor will fulfill his legitimate promises or not.
Contingency funds are also required for positive events in our life such as passion projects, wedding, gifts for loved ones, anniversary celebrations, higher education of self/children etc. Set aside a contingency fund for meeting these unexpected expenses as well. Thumb rule is usually 6 months – 1 year of living expenses.
Future Income:
These will include policies and deposits that will mature in the future and will be collected as a lump sum.
Lets us put together all these numbers into a simple equation and arrive at your retirement number:
(Annualized Ongoing Income – Annualized Ongoing Expenses) X(100 – current age)# + Current Net Worth+ Present Value of Future Income – Contingency Fund = Retirement Corpus (Post Tax)
# assumes a life span till 100
If the number is positive, you are ready to retire today. Congratulations. If the number is negative, it indicates the short fall you have to accumulate to achieve a comfortable retirement.
You may find numerous other ways to calculate your desired retirement corpus online. But most of them involve numerous assumptions on your return on investment and inflation, which no one has any idea about what it will be over the years. So I have tried to simplify things a little bit here and focus on things we know about.
Build a Buffer:
This is only the bare minimum amount required. Incomes drop and expense increase due to age related disorders. It is good to build a buffer for such things. Life is not and will never be linear. However we can arrive at basic numbers and customize to your circumstance to arrive at a more accurate picture.
If you want to lead a simple life, retirement may be closer than you expected. If you want to life your life king size, you can plan for it for you now know your magic retirement number.
My retirement plans..probably this..
