With retirement, the process normally followed is to take current expenses and inflate them by a given rate (often the prevailing wholesale or consumer price index inflation rates). This helps you arrive at how much you will spend when you’re retired.
One of the core tenets of planning for a particular goal is to take its current cost, inflate it at a given rate of inflation to arrive at its cost at that particular time. This is typical of planning for goals like your children’s education or wedding expenses. So, for e.g. if the course fee at the Indian Institutes of Management is roughly Rs 15 lakh today at an 8% inflation rate, you’d need to have about Rs 48 lakh, 15 years from now.
With retirement, the process normally followed is to take current expenses and inflate them by a given rate (often the prevailing wholesale or consumer price index inflation rates). This helps you arrive at how much you will spend when you’re retired. So, for example, if you spend Rs 1 lakh per month today you will need almost Rs 7 lakh a month if your expenses inflate at 8% a year for the next 25 years.
The most basic difference in planning for diverse goals is that retirement is the one goal/ end use for which no bank will lend you money (unless you take out a reverse mortgage).
The other important difference between planning for goals like retirement and those that are almost entirely external to you like education (you cannot influence costs at premier institutions) is that there’s no choice but to expect them to inflate year after year. However, with retirement, most expenses are much more in your control. That is, you might choose to change your consumption pattern so as to manage within lower expenses. Let’s take the earlier example a little further:
In one detailed scenario (arrived at by looking at 20 years expense and consumption data for a particular household), we found, that ‘effective inflation’ which is a mix between inflation and consumption pattern changes is likely to be closer to4% rather than 8%. So, in our current example, the resulting expected expenses reduces from Rs 6.85 lakh per month to about Rs 2.5 lakh a month. The corpus that needs to be built over 25 years changes from over Rs 10 crore to about Rs 6.5 crore.
So, don’t be intimidated by what simplistic models or some financial planners tell you. Get started on planning for your key goals like retirement – delay is probably the biggest cause for people not saving enough.
The author is a co-founder & CEO at Bigdecisions.in (the platform that helps take smart personal finance decisions)
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