Retirement Planning | Follow these 3 steps to ensure Rs 2 lakh monthly pension after retirement and Rs 4 crore in savings

August 12, 2021

Follow these 3 steps to ensure Rs 3 lakh monthly pension payout after retirement and Rs 4 crore savings


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Key Highlights

  • Most people are not able to retire early as they are not able to save enough before achieving the superannuation age of 60.
  • Experts say that an early start and prudent allocation to growth assets can help an individual create sizable savings
  • People often fail to achieve financial freedom because of their miscalculations

New Delhi: Almost everybody in this world wants to achieve financial freedom as soon as possible so that they can enjoy a worry-free retirement and pursue their hobbies during their golden years. According to financial planners, one can achieve financial freedom when he can be assured that his savings will take care of all his future financial needs and he does not have to work further. Most people are not able to retire early as they are not able to save enough before achieving the superannuation age of 60.

However, experts say that an early start and prudent allocation to growth assets can help an individual create sizable savings, that will take care of all his future financial needs such as retirement, children's education, marriage, much before his/her superannuation age so that he/she can achieve financial freedom. 

People often fail to achieve financial freedom because of their miscalculations; they often don't factor inflation into their calculation while saving for their retirement. Even a moderate 5% inflation can push up monthly expenses to unimaginable levels in the longer term. For example, if a retired couple needs around Rs 50,000 per month now to have a comfortable living, the amount will increase to Rs 2.16 lakh after 30 years assuming a moderate inflation rate of 5%. Also, this amount will keep on increasing every year after retirement in-line with inflation.

By the time you retire, healthcare expenses would have been a bigger part of your monthly expenses and it is growing at a faster clip of 10-12% every year. Unless an individual plans properly, he can not afford quality health care when he needs it most.  

Here are three steps one should follow to achieve worry-free retirement:

Start investing from an early age

By starting savings and investing early you give your savings more time to grow. The effect of compounding works well in the longer term. Typically, at an early age, one is not able to save because of low income. But believe me, even if you save an amount as small as Rs 5,000 per month from the age of 25, and grow this savings at a fixed rate of 10% every year, you will be able to save a hefty amount of Rs 8 crore the time of your retirement. This will be possible even if we assume that your annual income grows at a moderate rate of 5% every year( in some years you may not get any hike but on every job switch you can get between 20-30% increment, which will cover up the lost earnings growth of those years). But if you start saving for your retirement at a later age, say from the age of 40, you can not save this amount even if you save a bigger amount monthly.

Increase your monthly savings at an incremental rate

Apart from starting early, one needs to increase his/her savings (as a percentage of her income) every year at an incremental rate. This is possible because after one stage your fixed expenses will not grow much and you have to give efforts to keep them as low as possible. For instance, at the age of 25, your monthly income is Rs 40,000 and you start saving Rs 5,000 per month (12.5% of your annual income). Increase this savings by 10% every year even if your annual income rises at a moderate rate of 5-6%. If you follow this strategy by the time you turn 60, your monthly savings would have increased to Rs 1.40 lakh while your monthly salary would have been Rs 2.20 lakh.

Invest in the right asset class

According to RBI's latest household savings data, fixed income options such as fixed deposits, recurring deposits, Provident Fund, small savings schemes etc, which generate an annual return between 5-8%, account for 53% of total financial savings while equities and mutual funds, which can generate an annualised return of 12%, account for a little over 10% of the total savings. Worth mentioning here is that only by starting early you can not accumulate the corpus that is required for achieving financial freedom, you also need to invest in the right asset class.

Equities or equity mutual funds, as an asset class, have the potential to give the highest returns in the long term. According to investment experts, one can expect an annualised return of 12% from this asset class if you are investing for the longer term. Given that India's economy is growing at around 7% and it is an emerging economy, equities can generate a return of 12% over the next two-three decades.

How to secure your retirement?

Assume that your current age is 25 years, and your monthly income is Rs 40,000 and expenses are Rs 35,000. Save Rs 5,000 through SIP in diversified largecap equity mutual funds every month. But every year increase your SIP amount by 10% till the age of 55 years. By following this strategy you would be investing around Rs 87,000 per month in SIP. Assuming an annualised return of 12% from your SIP your investment would have grown to a little over Rs 4 crore. By that time your monthly expenses would have grown to Rs 1.51 lakh factoring in an inflation rate of 5%. If you want to retire by that age you can do that as your retirement corpus of Rs 4 crore can easily take care of your retirement expenses.

Use SWP after retirement to get monthly pension

At the age of 55, your monthly expenses would have grown to Rs 1.51 lakh. If we assume an annual inflation rate of 5% you need an amount of Rs 1.03 crore to meet your retirement expenses for the next five years. So take out Rs 1 crore from your retirement corpus and park that amount in ultrasafe instruments like liquid mutual funds or overnight funds and withdraw the required amount through step-up systematic withdrawal plan (SWP) for the next five years. Let the remaining Rs 3 crore grow in the equity mutual funds. After five years when you would have exhausted the amount parked in SWP account, your equity MF corpus would have grown to Rs 5.25 crore. Transfer another Rs 1.22 crore from the equity mutual fund to your SWP account. This will take care of your expenses for next 5 years. Repeat this process till you are alive. You will never face misery in your retirement.  

Take care of the following things

Even if you follow the above investment strategy, you need to take sufficient life cover for yourself and comprehensive health insurance cover for the entire family. This will ensure that you don't have to dip into your savings whenever an unforeseen event occurs. Experts say a pure term plan is the best way to insure your life. The term insurance cover should be at least 8-10 times your annual income. If there are some other liabilities like housing loan, take separate cover for them. outstanding big-ticket debts like a home loan or education loan, take additional cover for them.