Retirement planning after your mid thirties

Wrong. How and where you invest, and whether you’re investing under a Planner’s guidance, can be the difference between simply retiring, or having truly enjoyable and relaxed golden years with no financial concerns.
Let’s look at how the numbers work and the 2 things that can have a huge impact on your retirement corpus.

1. Longer Life Expectancies
While living longer thanks to better medical care and a higher quality of life can definitely be a plus, it also means you are running the risk of outliving your retirement corpus. When planning your retirement, it is always better to be conservative when estimating your life expectancy.

For example, if you are currently 40 years old and wish to retire at 55, assuming a post retirement expense of Rs. 1 lakh per month on household, travel and medical totally and inflation of 7% p.a., your retirement corpus required would be Rs. 7.31 crores.

But, keeping everything else equal, and assuming you live until 85, your retirement corpus should be Rs. 11.52 crores.

As you can see, that’s a very significant difference. And when planning your retirement, you’d rather be safe and conservative in your assumptions, than make aggressive assumptions and come up short at a time when you would not be able to earn any income.

If you are still certain that you would like to assume a life expectancy of 70 or 75, consider what age your and your friends’ grandparents and parents lived upto to help you make a decision.

2. Higher Future Cost of Living
In the first point above, we have assumed inflation of 7% per annum. This is because, historically, over 10 year periods, this is approximately what inflation has been in the range of (6% - 7% per annum).

But in the last few years, especially from 2009 onwards, we have seen galloping inflation thanks to the ongoing global financial crisis. Considering that if you are in your mid thirties or older, and you will continue to earn for another 20 years or so, it is likely that you will witness another financial crisis sometime in the next 2 decades. If that happens, and we see inflation the likes of which we are seeing right now, the average inflation rate that we will live through is likely to be higher than 7% per annum. With an increased inflation rate, cost of living goes up exponentially, the further into the future we project.

Consider the example given in the point above, where we had assumed 7% inflation per annum. What if this figure were 7.5%? Would we see that much of a difference?

Yes, we would. Inflation can actually break your retirement . Keeping everything else equal, a 40 year old, retiring at 55 with an expense of Rs. 1 lakh a month currently and assuming a life expectancy of 75, would need to build a corpus of Rs. 8.25 crores.

If you assume a life expectancy of 85 years, you would need a retirement corpus of Rs. 13.34 crores. That’s the difference made by a 0.50% increase in inflation.

Here’s what we’ve seen so far:

Example
Current Age: 40 years
Retirement Age: 55 years
Life Expectancy: 75 years vs. 85 years
Monthly expense in today’s terms: Rs. 1 lakh per month (including household, travel, medical)
Inflation: 7% vs 7.5%, and also let’s consider 8% per annum