Plan and Calculate Your Retirement Corpus Wisely

Published On: 12-May-2020

The post-retirement phase of life is generally seen as ‘the second innings’ wherein one intends to fulfil their dreams and aspirations, which could not be fulfilled earlier due to commitments. Post-retirement, it is natural that people have reduced income. So, it is paramount to plan well for retirement so that the pending dreams do not face financial constraints. 

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How to calculate retirement corpus and monthly investment required to achieve such a goal?

Investors must have a systematic approach to financial planning for retirement. Here is a step-by-step process to approach retirement planning:

Quantification of the Estimated Regular Expenses

The first step, setting the solid foundation for effective retirement planning, is to quantify the estimated regular expenses one may need post-retirement. One must be careful in not only considering the current lifestyle expenses but also factoring in the expected medical costs due to old age and additional lifestyle expenses on account of new habits and aspirations. 

Adjusting the monthly outflows to expected inflation 

Expenses which have been estimated at today’s prices must be suitably adjusted for the expected inflation over the period. This is important, as an expense of Rs. 100 today may call for a higher amount tomorrow due to reduced purchasing power of the currency in the future due to inflation.  

Investing monthly for retirement goals

Once the retirement corpus is calculated, one must calculate the monthly investment required towards retirement goals, which will again depend on certain assumptions like the expected return from the investments over the period, existing investment portfolio, etc. 

Periodic Review

Retirement planning is not a one-time exercise but calls for periodic review of the plans since the financial plan is based on certain assumptions. As such, the actual achievement vis-à-vis the assumptions made must be reviewed regularly and correction action taken on a timely basis. 

Using Mutual Funds for Retirement Planning

Mutual Funds offer a wide range of investment options, which may suit different investors with various risk profiles. However, for long term financial goals like retirement planning, equity schemes are more suitable, as they carry a potential of higher returns for the investors. 

While equities may be volatile over the short term, they have reflected an immense potential for wealth creation in the long run. While one think about the recently introduced 10% tax on Long Term Capital Gains (LTCG) on equity funds, it should be noted that this is one of the lowest tax rates on investment returns. 

Further, besides a wide range of mutual fund schemes, mutual funds also offer systematic options to invest through Systematic Investment Plans (SIPs). As the age progresses, the risk appetite steadily shifts from aggressive to conservative, and accordingly, the risk profile of the investment portfolio should be aligned with the same. 

One may utilize a Systematic Transfer Plan (STP) to switch investments from equity funds to debt funds. Once the investor reaches the retirement phase, one may periodically withdraw from the investments through a Systematic Withdrawal Plan (SWP) to reap the benefits from the accumulated corpus.

It becomes crucial for the investor to stay committed to their financial plans and continue investing in their retirement goals.