Conventional financial planning suggests taking your current
expense levels and inflating them by the prevailing consumer price index, to
arrive at expected expenses post retirement.
There is more to estimating your expenses at retirement than
just simply inflating your current expenses at the Consumer Price Index.
Conventional financial planning suggests taking your current
expense levels and inflating them by the prevailing consumer price index, to
arrive at expected expenses post retirement. The next step is to then arrive at
a corpus or sum of money that you need to put aside that will provide for the
given expenses. However, the Big Decisions inflation index as shown in the
table below, shows the more likely expected inflation levels in a given age
band.
Our index indicates a lower than conventionally expected
inflation of expenses for retirement and, therefore, a lower amount of savings
and investments will help the family's primary income earner to meet the goal.
Let's see how the two approaches differ for a 35 year old
man who is the main income earner of a family of four people, expecting to
retire at the age of 60 and whose current family expenses, including an EMI for
their home is Rs 75,000 per month.
Conventional Retirement
Plan Company would suggest that the family's expenses would inflate
@7% a year for the next 25 years, resulting in their expenses becoming a little
over Rs 4,00,000. Even if the family expects to earn a post-tax return of 8%,
the primary income earner will need to plan to build a corpus of over Rs 9
crore, requiring him to save more than Rs 90,000 per month.
Taking the BigDecisions.com index into account, the family
can expect expenses to inflate only at 3.5% per annum for the next 25 years,
resulting in the family's expenses being under Rs 2 lakhs per month. To prepare
for this, the family will need a corpus of under Rs 4.5 crore and a monthly
saving of less than Rs 45,000 per month.
The methodology
used to compute this index was to look at 20 years of daily expense data of a
given household,remove one-time expenses to arrive at how increase due to
inflation, combined with reductions in consumption, impact the effective
inflation rate for a household. These results are meant to be indicative and
may vary across different households.
[Source: https://www.tomorrowmakers.com/articles/retirement/what-will-retirement-cost-me]
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