How fast one can do retirement planning? The answer is two minutes maximum. Nowadays, there are many calculator available in which one has to simply input the data and he will get the required amount for retirement without compromising the current life style. Is retirement planning is so easy? Should you chart your retirement plan with such retirement calculator? how accurate investing for retirement using calculator is? What all points should you consider while doing retirement planning? Let’s go dipper into the retirement calculators and evaluate the other side as well.
For retirement, people are focusing mainly on the regular income flow after retirement as there is no main source of income is available. People need assurance of regular income rather than wealth creation when it comes to retirement planning. There are two phases in retirement plan. One is accumulation phase and another is distribution phase. When you start saving for retirement you are in accumulation phase for creating a corpus for retirement. Once you get retire and start withdrawing money from that corpus is called distribution phase.
For example, you start investing at the age of 30 for your retirement and you get retire at the age of 60 and you are expected to live till 80 years. The time gap between your current age till retirement is accumulation phase and the time gap between your retirement till you live is distribution phase. In this example, 30 years is accumulation phase and 20 years is distribution phase.
Can I trust retirement calculators?
There are various free retirement calculators available online. These are so called quick calculators in which you just have to input some data and it will quickly show you the required numbers to achieve the retirement goal.
Let’s go through the data points require to input into such calculators for deriving retirement corpus.
- Your current age
- Your retirement age
- Your current monthly expense
- Your life expectancy
- Monthly expenses after retirement
- Inflation rate during accumulation phase
- Return on investment during accumulation phase
- Taxation impact during accumulation phase
- Inflation rate during distribution phase
- Return on investment during distribution phase
- Taxation impact during distribution phase
Now let’s check how many of the above figures you have with you? Most of them are assumptions except for the current age and retirement age. The point here is you are doing your retirement planning based on the assumptions. So you have to input the data very thoughtfully as it will impact your entire retirement planning. If there is any wrong or inaccurate data input, your entire planning will go for a toss.
Let’s discuss these assumptions one by one as to how they can adversely impact the entire planning if wrongly entered.
In India, retirement age is 58 years in common. Certain central government department has a retirement age of 60 years. So here we are assuming that you are going to work till your retirement age i.e. 58 years. But what if suddenly there is a day on which you might lose your job? Life is not as straight as we think and plan. A midlife crisis can happen when men think they’ve reached life’s halfway stage and feel the time is running out.
The midlife crisis hits men at the age of around 40 and it lasts for three to ten years. It’s a normal phenomenon and occurs in one’s life. You can check your surrounding people who have gone through this phase. So assuming a secure job till your retirement is a danger sign.
The other factor affecting your job is your health. What if you are not able to perform your job due to ill health? Is there any guarantee that your health will remain as it is till the time you retire? In such situation, you have to forcibly start your retirement life much earlier than its actual time.
There is a stiff competition in the market for job, what if there is a young graduate taking his first job at a lower salary than you? Your organization will kick you out as it thinks that you are not fit for the role and new comer can perform the same task at a low salary level. You will be jobless. That’s the reason I always ask people to have a second source of income so that you can at least survive in such situation if it occurs with you.
There is a new trend seen that people want to retire early. They don’t want to do a job till 60 years and want to peruse their passion. But they don’t know that early retirement is big mistake they are going to commit.
So prepare yourself for forcefully early retirement.
We think that with the current lifestyle and our food habits, we are not going to live more than 70 years. But the fact is life expectancy will go up day-by-day due to advance medical. We may live much more than we think we can. In such situation, you need more money to survive in that extra years. This will impact your retirement planning. You don’t have any source of income at this stage, nor your corpus is going to give you more returns during that phase. It will be a horrible situation and you might have to live at the mercy of your child.
There are two points where we make mistake while judging the expenses after retirement. First, we think that there will be a low expenses as by that age you will have no liabilities like paying home loan or car loan EMIs. You also don’t have to pay the fees of your children’s education any more. Second, we ignore any major medical expense that may arise during the accumulation or distribution phase. The medical expenses are increasing in India like never before.
Most of the people are taking a health insurance plan considering the current medical expenses. But they forgot the impact of inflation due to which the expenses are bound to go up many folds. One major medical expense will swipe up your entire life’s savings. So you have to consider a slightly higher expenses for medical emergency while planning for retirement.
Secondly, what is the guarantee that your children will be settle well and can stand on their own feet? What if they turn out to be a liability? I have seen parents are scarifying their retirement corpus for settling up their child. They gave all their money to their child for starting up a new business which has no guarantee of return on investment.
Return on investment
In most of the retirement planning we see a handsome return of 15% + CAGR. This is possible in equity investment in the long run say for 10 + years. But from where this 15% return came into picture? This is based on the past performance of the equity market and available data. India is a developing country and is growing at the rate of 6 to 7 per cent year on year. The country is marching towards becoming a trillion economy in coming years.
Once the country will attain that stage, the growth rate will be slower down. There will be no more 7% economy growth at that stage. Look at the developed countries like United States and China. Their economy has attain that stage hence the growth is stable and lower. There will be no guarantee that your investment will fetch you 15% YoY. That’s the reason there is a standard disclaimer that says : Past performance is not a guarantee of future returns.
During the retirement calculation, we assume the inflation rate for both accumulation phase and distribution phase. We consider the average current inflation rate. But actual inflation may be higher or lower than what we have assume. If it’s higher than the actual inflation rate, it is ok but if its lower than the actual inflation rate you are in trouble. Your entire calculation will be in mess.
In India, tax rates are highly uncertain and keeps on changing frequently. In the recent budget 2018, government has re-introduced LTCG tax. The impact of this was not considered while doing investment planning. Now there will be a dent on the returns from this investment due to LTCG tax impact. Moreover, the taxation rates keeps on changing so no one will know what will be the tax implication ten years from now.
In such situation, we can only assume the tax implication as per the current rates only. If the tax rates in the future is favorable, then it’s ok. Otherwise you will lose your profit earned from the investment and eventually hamper your retirement corpus.
How do I plan for my retirement?
As we learned that there are many assumptions while using retirement calculator, we should not restrict our self on the amount shown via these calculators. Always keep margin of safety, means if the calculator shows you the investment amount require for meeting your retirement needs is Rs. 10000/month. Try to invest higher amount than this required amount.
So in case if there is any assumption which goes wrong, you are not off track from your retirement goals. The other way to look at this is by reducing the retirement age so that the monthly investment amount will increase to meet your retirement goal.