Retirement or Pension Planning - Most important thing to do for salaried Individuals

2 Steps for Retirement Planning..

Retirement planning is the most important thing which most of the people tend to forget or avoid. Unlike developed countries India is a country which has no or meagre social security for its citizens, which means that you are on our on-post retirement. So, the planning for the retirement should also happen as early as possible.

The retirement planning should be started as early as possible but the best period to kick start if not started is between age of 30-35 as in that time the people's life has settled and the earnings ratios are good as they are in the age period where the earning is good and liabilities are less.

There is various question which can comes in the mind of people:

• How to do retirement planning?

• How much you need to get a decent retirement amount?

• How to calculate the decent retirement amounted?

Let us talk about all these in subsections below.

Retirement planning can be divided in two phases.

• Accumulation of Wealth

• Withdrawal of wealth

The accumulation of wealth is done in first phase where the target is set by an individual for the corpus, he/she wants at the time of retirement.

The withdrawal of wealth is done in the withdrawal phase and there should be an intelligent plan to reinvest the amount received from retirement corpus otherwise the whole planning can go in jeopardy. Let's discuss the both the phases in detail.

Accumulation of Wealth

Steps to be kept in mind for the first stage in Accumulation of wealth.

• Plan and calculate to set a goal for the retirement amount with the expenses you have today.

• Take your lifestyle and inflation in consideration.

• Try to project the actual expenses at that time including medical expenses.

a) Plan and decide your future expenses and the period post retirement.

The planning of expenses is most important part of accumulation phase, the expenses are not something which is stagnant but they keep on increasing due to inflation (the power of money declines with time, let assume it to average 6%).

The life expectancy should be assumed by retiree like post retirement someone expect to live till 80 years of age so the period post retirement is 20 years

Considering the inflation if we assume an expense, we are doing today with the same type of expenses worth same amount after 20 years. As due to inflation the purchase power of money declines, so if you are running your life with 50000/- month expense then money required to do same expense after 20 years can be calculated as follows.

• Let's assume inflation at 6%.

• Present value=50000

• Time=20 years.

Future value of 50000 after 20 years=160356(one lakh sixty thousand three hundred and fifty-six), this means the expense you are able to manage today with 50.000 rupees today would be possible to manage by 160356 rupees after 20 year due to inflation.

So, if you are running your home in 50000 per month today then to continue same type of expenses post 20 year you need 160356/month.

Below is an example of Mahesh's plan for retirement referring both the accumulation phase and withdrawal phases.

E.g. Mahesh has a age of 40 years he plans to retire at 60 and the life expectancy he feels is 80 years, and he is running his home with all needs in 50000(fifty thousand a month), but he feels that today there are some more expenses which won't be post retirement so he can then run his home post retirement in 40,000 worth of money he earns today. So yearly he needs 40000X12=4,80,000(four lakh eighty thousand). Assuming an inflation of 6%, after 20 years he would need an amount of 1539425(fifteen lakh thirty-nine thousand four hundred and twenty-five), to incur 40,000 worth of expenses per month in a year as he does today.

So, Mahesh needs to withdraw amount of 1539425 at the age of 60 from his retirement corpus for the 60th year of age, but the Accumulated corpus would be reinvested also which would also earn some interest money post retirement also, but that need to be taken care in accordance to the prevailing inflation so that purchasing power remains the same in the retiree hand. The would be done in the next step.

b) Calculate how much retirement Amount you actual need on retirement.

There are few things which we need to keep in mind while calculating the retirement amount, we actually need on retirement.

• After retirement the amount accumulated has to be deposited which would also give some returns, need to assume it before hand for calculation.

• The inflation has to taken in account for the retirement corpus if invested post retirement, so that the money power in hand of the retiree remains the same even with inflation post retirement.

• Calculate the real rate of return precisely from the amount invested which come after adjusting the investment earned to the inflation.

Continuing with Mahesh example we are now aware that Mahesh need to have Rupees 1539425 each year to continue the same spending style as he has today.

Assume that Inflation is 6% post Mahesh retirement.

Assume that he earns 6.5% on the money he accumulates on retirement.

So, net returned he earns is 6.5%- 6% =.05%, looks simple and approximate, but the actual Real rate of return comes from formula (1.065/1.06) -1 =.0047169 (precise calculation), so his post retirement corpus earns a return of .47169% when inflation is adjusted.

Let's calculate the Actual money Mahesh need to retirement.

Rate of return on Corpus=.047%

He needs to withdraw amount =15,39,425 each year.

Time period=20 years.

Amount to be accumulated at the age of retirement =2,93,14,948 (Two crore ninety-three lakh fourteen thousand nine hundred and forty-eight only)

c) Plan for the retirement goal amount, with monthly amount to be saved each month from today to reach retirement amout goal.

As per the calculation done above Mahesh need to have a corpus of 2,93,14,948 (Two crore ninety-three lakh fourteen thousand nine hundred and forty-eight only) for his retirement saving. So he needs to plan for the same as he has time left for 20 years only to save.

Let's assume that interest return as of now is 8% in fixed income securities.

Time span is 20 year

Target accumulated amount: 2,93,14,948

He needs to save =6,40,596.37 rupees each year i.e. 53,383(Fifty-three thousand three hundred eighty-three rupees monthly) So Mahesh need to save each month rupeees 53583 and invest in some vehicle returning a return of 8% to reach the goal of retirement amount 2,93,14,948 (Two crore ninety-three lakh fourteen thousand nine hundred and forty-eight only)

2. Withdrawal Phase

The withdrawal phase is also the most important phase, where an individual should take utmost care in investing the corpus accumulated for retirement, he should invest in the safest possible instrument to beat the prevailing inflation, the corpus could be used to buy any Annuity plan or fix income securities or post-office scheme of Simple fixed deposits from banks.

Below is the withdrawal pattern of Mahesh investments accumulated during retirement years.

It is assumed that Mahesh Invested the Retirement corpus with return of 6.5%

Prevailing inflation=6%.

The below chart and each year investment would show how Mahesh would be withdrawing the amount each year post retirement.

Year	Starting corpus	Year Start Balance	Interest earned	Year-end Balance	Year-end balance	Withdrawal Pension amount
1	₹ 2,93,14,948.00	₹ 2,93,14,948.00	₹ 1,38,275.68	₹ 2,79,13,798.68	₹ 2,77,75,523.00	₹ 15,39,425.00
2	₹ 2,77,75,523.00	₹ 2,79,13,798.68	₹ 1,31,666.60	₹ 2,65,06,040.28	₹ 2,62,36,098.00	₹ 15,39,425.00
3	₹ 2,62,36,098.00	₹ 2,65,06,040.28	₹ 1,25,026.34	₹ 2,50,91,641.62	₹ 2,46,96,673.00	₹ 15,39,425.00
4	₹ 2,46,96,673.00	₹ 2,50,91,641.62	₹ 1,18,354.76	₹ 2,36,70,571.38	₹ 2,31,57,248.00	₹ 15,39,425.00
5	₹ 2,31,57,248.00	₹ 2,36,70,571.38	₹ 1,11,651.72	₹ 2,22,42,798.10	₹ 2,16,17,823.00	₹ 15,39,425.00
6	₹ 2,16,17,823.00	₹ 2,22,42,798.10	₹ 1,04,917.05	₹ 2,08,08,290.15	₹ 2,00,78,398.00	₹ 15,39,425.00
7	₹ 2,00,78,398.00	₹ 2,08,08,290.15	₹ 98,150.62	₹ 1,93,67,015.78	₹ 1,85,38,973.00	₹ 15,39,425.00
8	₹ 1,85,38,973.00	₹ 1,93,67,015.78	₹ 91,352.28	₹ 1,79,18,943.05	₹ 1,69,99,548.00	₹ 15,39,425.00
9	₹ 1,69,99,548.00	₹ 1,79,18,943.05	₹ 84,521.86	₹ 1,64,64,039.92	₹ 1,54,60,123.00	₹ 15,39,425.00
10	₹ 1,54,60,123.00	₹ 1,64,64,039.92	₹ 77,659.23	₹ 1,50,02,274.15	₹ 1,39,20,698.00	₹ 15,39,425.00
11	₹ 1,39,20,698.00	₹ 1,50,02,274.15	₹ 70,764.23	₹ 1,35,33,613.37	₹ 1,23,81,273.00	₹ 15,39,425.00
12	₹ 1,23,81,273.00	₹ 1,35,33,613.37	₹ 63,836.70	₹ 1,20,58,025.07	₹ 1,08,41,848.00	₹ 15,39,425.00
13	₹ 1,08,41,848.00	₹ 1,20,58,025.07	₹ 56,876.50	₹ 1,05,75,476.57	₹ 93,02,423.00	₹ 15,39,425.00
14	₹ 93,02,423.00	₹ 1,05,75,476.57	₹ 49,883.47	₹ 90,85,935.04	₹ 77,62,998.00	₹ 15,39,425.00
15	₹ 77,62,998.00	₹ 90,85,935.04	₹ 42,857.45	₹ 75,89,367.49	₹ 62,23,573.00	₹ 15,39,425.00
16	₹ 62,23,573.00	₹ 75,89,367.49	₹ 35,798.29	₹ 60,85,740.77	₹ 46,84,148.00	₹ 15,39,425.00
17	₹ 46,84,148.00	₹ 60,85,740.77	₹ 28,705.83	₹ 45,75,021.60	₹ 31,44,723.00	₹ 15,39,425.00
18	₹ 31,44,723.00	₹ 45,75,021.60	₹ 21,579.92	₹ 30,57,176.52	₹ 16,05,298.00	₹ 15,39,425.00
19	₹ 16,05,298.00	₹ 30,57,176.52	₹ 14,420.40	₹ 15,32,171.92	₹ 65,873.00	₹ 15,39,425.00
20	₹ 65,873.00	₹ 15,32,171.92	₹ 7,227.10	₹ -25.98	₹ -14,73,552.00	₹ 15,39,425.00

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