A Quick Thumb Rule for Retirement Planning

1.      

Total Financial Savings Required at the time of Retirement

With this saving, you should be able to deal with your income needs after retirement

Note that, with average life expectancy expanding, you may need to plan for a good 30-40 years after retirement

The objective is to ensure you have sufficient savings not only at the point of retirement, but also to maintain your future standard of living adjusting for inflation

Financial savings does not include the house that you live in, but all other form of savings including Debt, Equities, any real estate beyond the house that you stay, PF, etc

2.       Current Annual Expenses

This is your current household expenses and assumes you own the house that you stay in

Therefore, do not include your EMI towards your house in this

This would not include ‘goal based’ expense planning like Child’s college education or marriage – which needs to be planned separately

Objective is to simply ensure the family – husband and wife – have sufficient income available to maintain their life on retirement plans

Note that this is a quick thumb rule to ensure same standard of living. Child’s education expense at the age of 40 will be replaced by medical or ‘travel’ related expenses at the age of 60.

3.       1.07 ^ Number of years to retirement

Here we try to project expenses at a future point in time, assuming a 7% rate of inflation

Though inflation has been higher in the past few years, it should settle at about 7% for the next few years. This rate is closer to the zone for comfort for the RBI.

4.       X 25

It is important one understand why you need to have 25 times your annual expense at the time of retirement

This assumes that your portfolio makes close to 10% pa at the time of retirement – therefore assumes you have a reasonable mix of equity, debt and real estate at the time of retirement – as debt alone cannot generate real inflation adjusted returns

Of the 10% that your portfolio makes, you can use 4% for your annual needs. The balance 6% needs to be invested back in the portfolio to maintain your income for future inflation protection.

We hope this is useful. This is a quick thumb rule and you specific life situation may have unique needs. But as long as your planned financial savings is at least 25 times your inflation adjusted expense requirement, retired life should be fun.

Source: https://scripbox.com/blog/a-quick-thumb-rule-for-retirement-planning