It is said life starts after retirement, thus it’s like a dream for every working professional. However, definition of retirement may vary from person to person. For one, retirement may be complete exit from work life and spent time with family and for another it may be only an exit from employment and pursue things which one loves; in either of the case one must ensure that there is sufficient corpus available to take care of one’s need and requirement.
Upon retirement, your income ceases while expenses continue to grow with inflation. Here are a few simple steps that can be considered as a part of one’s retirement planning process:
■ Calculate the corpus required post retirement
The first step is to find out the corpus that is needed when you retire. This corpus will take care of your monthly expenses post retirement. The corpus should also take care of the inflation impact.
■ Investment required, to build the corpus
Once you have decided on the corpus amount that will be required in order to take care of your monthly expenses, you need to identify the investment amount that will be required in order to meet the required corpus amount. The investment amount can be derived based on the expected returns. However, this will also depend on one’s risk appetite, based on the risk profile portfolio that can be designed and the expected returns can be estimated.
For example, let’s say 27-year-old Mr. Venkat want to retire at the age of 50 years (assuming life expectancy of 90 years.). He needs a corpus of `2 crore on his retirement – Here is how the corpus can be build (see chart). Lower the returns, higher would be the monthly investment amount required and vice versa. Thus if Mr. Venkat has high risk profile, he will have to invest monthly approximately `14,000 in order to meet the required corpus.
■ Decide on asset allocation
This is one of the most crucial part of financial planning. As ones investment and the returns will depend on the way portfolio is structured and managed. It is always advisable to have a well-diversified portfolio that comprises of different asset classes (see chart), as diversification will not only help is reducing the risk but also enhance the returns.
(The writer is CEO, Right Horizons, a wealth management firm)