Jagoinvestor

July 21, 2009

6 Steps of doing Retirement Planning by yourself

In this post I will teach on how to plan for retirement. We will use simple tools like Mutual Funds and PPF for building Retirement Corpus.

We will also see what factors you should take into account when you plan for retirement. There can be other ways of doing this and it can be very complex with very advanced calculation. But in this post we will look at it in a very simple way which a common man can understand.

Retirement Planning

So you are finally deciding to plan for your Retirement. You need to understand following steps:

  • How much is your Current Yearly Expenses
  • How much will be average Inflation figure for the coming years
  • How much would you need at your Retirement
  • Finally coming up with the corpus you would need at the retirement
  • Calculating how much you should save per month
  • Understanding where to invest the money

We will see all the above points in detail and go through some examples side by side to understand the process in well. Let say we are taking an example of Ajay who is married and has 2 kids below the age of 6 yrs. He has a monthly salary of Rs 40,000 per month. His age is 32 yrs and he wants to retire at age 60.

Step 1: Calculating you Current Yearly Expenses

Take a piece of paper (do it now as you read this) and make a note of your expenses, things like Rent, House hold expenses, Children fees etc etc. You should have a rough idea of what is the minimum amount you require per month for living a good life. You should also try to save a part of your salary every month, Ask your self Can you live with 90% of your Salary ?

Ajay calculates his expenses:

Rent – Rs.10,000
House hold expenses – Rs.11,000
Medical Expenses : Rs.1,000
Entertainment and outing : Rs.3,000

Total Monthly Expenses : Rs.25,000
Yearly living Expenses : Rs.3,00,000 (12 * 25,000)

Other Expenses like Vacations and Surprise Expenses : Rs.50,000

Total Yearly Expenses : Rs.3,50,000

Step 2 : Understanding how much Inflation would be there in coming years

This is the inflation you expect in coming years till your retirement. I calculated the average inflation from last 28 yrs (1990-2008). The CAGR inflation was 7.3% Source.

Considering a better economy in future I expect the inflation over next 20-30 years to be 6-6.5%. Lets take 6.5% for our calculations here. However you can assume your own rate as it depends on your understanding.

Step 3 : How much amount would you require in your Retirement

By this we mean how much money will provide you same standard of living as of today. This will depend on the Current Yearly Expenses, inflation expected over the years and years left for retirement. Just like we require Rs 105 to buy something of cost Rs.100 in 1 yr at 5% inflation. The same way we can cost how much is is needed after X yrs.

So formula would be

Retirement yearly Expenses = Current Yearly Expenses * (1 + inflation)^(number of years left)

Ajay has already calculated his yearly expenses as Rs 3,50,000. He has 28 more years at hand. He calculates his retirement yearly expenses.

Retirement Expenses = 3,50,000 * (1+ .065)^28
= 20,40,000 (20.4 lacs approx)

Now one can tweak this figure depending on whether you want to have higher standard of lifestyle than now (earning years) or more simpler life. You can decrease it or increase it to the quantum of your compromise. You won’t have to compromise on your Retirement if you are a Early Investor.

Step 4 : Finally coming up with the corpus you would need at the retirement

Here you may want to receive the monthly income for whole of your life and preserve the capital for your Children or any nominee. So you need a corpus which if you put in Bank or invest in some “guaranteed return fund”, you should get an amount per year which is equal to your Expected Expenses per year.

So suppose you expect to get a return of 7% per year. Then you need X amount at the end where 7% of X is = your yearly expenses.

Corpus needed = (Monthly Expenses)/(interest expected )

So in the case of Ajay the yearly expenses expected was Rs.20,40,000 and return expected is 7%. So we calculated the amount required for Retirement that is 20,40,000 / .07 = 2,91,00,000 (2.91 crores).

Note:

You can also buy an Annuity for a fixed number of years till when you want to receive the income (which also means you should have an idea of when will you die, which is not easy). So for example if you want to receive the the monthly Income till you are Age 80 (for 20 yrs).

The following formula will be used. See this Video or this article on Net Present Value to understand the calculations and Concept.

PVA = A * [ {(1+r)^n -1} / { r * (1+r)^n } ]

Where

PVA = Present value of Annuity (Amount you need to have at your retirement)
r= Rate of interest you expect to get
n = Number of years you want the Yearly Income .

So at the end of this, you will have the Amount you need for your Retirement.
Do you calculations online just now Here OR download the excel sheet Here.

Watch this video to learn how to do your own retirement planning :

Step 5: Calculating how much you should save per month

Here comes the interesting part, here there are two things

  • How much Return you expect to earn in long term
  • How much you can afford to invest per month

Both are related to each other. If you expect more return, then you need to invest less every month and if you can afford to invest more every month, you need to generate less returns for your investments.

So which is the better way? What should you decide first? The returns expected or monthly contribution you can make? I would recommend the other way, better we first decide how much we can invest per month, because that is what we can control better way. We cant control returns !!

I have this monthly contribution calculator to calculate how much you need to put every month to generate Rs X after Y years if you expect R returns, please feed these inputs there and get your numbers. To understand how its calculated you can see this video which explains some important formula’s in Financial Planning.

So here is the process

  • You figure out how much you can save
  • Then you find out how much return you need to generate
  • Then you decide where to invest to generate that return

You can also go the other way deciding how much return you can generate and based on that how much you need to save. But I prefer the first way because then you control things in your hand but you can go the other way too.

So our friend Ajay has a saving of Rs 15,000 at the moment (40,000 – 25,000) And he thinks that he can easily invest 10,000 per month at least over a long term. So the return he needs to generate per year CAGR for 28 yrs to generate his retirement corpus of 2,91,000,00 comes out to be 12.25%, see the calculator mentioned above.

So now you got to know how much you need to get per year in returns.

Step 6 : Understanding Where to invest it

This is the last step as per our article. So you got the CAGR return number which you need to generate over a long term. This number will decide how much risk can you take and where can you invest depending on your time frame. See below to understand which are the suitable products you can invest to get your returns.

Understand the ground Rules

  • Higher the return expected, higher the risk you need to take
  • More the Tenure, Lower the risk

Above 15% : Direct Stocks, Sectoral Mutual Funds, Equity Diversified Mutual Funds
10-15% : Equity Diversified Mutual funds, Balanced Funds
8-10% : Mix of Balanced Funds Debt Funds
Less than 8% : FDs, PPF, Debt Funds, Balanced Funds [ find out which FD is best ]

However, if the tenure is more than 10 yrs you should always go for Equity Funds. Never go for FDs or Debt funds if your tenure is long enough. Understand the Chemistry of Equity and Debt please.

So in our Example of Ajay, he requires a return of 12.3% CAGR in 28 yrs, so for this, he can invest in Equity Mutual funds through SIP he has different ways to achieve this like Doing a SIP in 3 Equity mutual funds OR combination of PPF (25%) and SIP in mutual funds (75%) OR Direct Equity (5-10%) + PPF + Some Balanced Funds. You got to be creative in this :), there are endless ways of doing it.

Conclusion :

Here you go!!, you just did your Retirement Planning 🙂 . You can do your retirement planning yourself easily. A financial planner will look into more details and will do perfect planning for you which would be best but this is pretty much great way you can adopt your self.

Involve yourself in this journey of Financial planning and you will be amazed to find how much Fun it is.

Subscribe
Notify of
guest

This site uses Akismet to reduce spam. Learn how your comment data is processed.

119 Comments
Inline Feedbacks
View all comments
Sekhar
Sekhar
7 years ago

Dear Manish

I will be retiring from my current job by end of this year. My current expense will be around 25 thousand per month. I am expecting to get pension of around 15 thousand per month and pf of around 30-32 lakh along with 10 lakh as gratuity. I have a private health insurance of 7lk and employer will have provide of 5lk. Can you please let me know how and where should I invest my pf and gratuity to get a regular income also to take care of inflation.
Thanks
Mr Sekhar

GauravNautiyal
GauravNautiyal
8 years ago

Hi Manish,
I tried to calculate the CAGR but for the example in your blog its coming differently for me at 32.96%(((29100000/10000)^(1/28))-1) which is very high . Also suggest, with my monthly saving of INR 50k what figure I can achieve and with which allocation as my retirement corpus seems to be very high (unless I am doing some blunder in calculation)

GauravNautiyal
GauravNautiyal
Reply to  GauravNautiyal
8 years ago

Hi Just want to add I am 35 years old and thus max working life is around 25 years.

Amit
Amit
8 years ago

Hi Manish,

Thank you for explaining this in such simple way. I have one question if you can help. Suppose I have 30 lacs of amount to be invested then what will be your allocation %age (FD, equity, metal, mutual fund etc) considering the fact that I do not want to invest in real estate as I already have a house. I can hold around 15 lacs for long term(7 yrs).

Shivani
Shivani
8 years ago

Very easy to understand article. Thank You Manish!

Mahesh
Mahesh
8 years ago

I am retired at the age of 58. On a current monthly expense of Rs.65000 and a life expectancy of say 85 to 90 years(taking a maximum number for age) and assuming I get return of around 10% since I have most of my investments in equity schemes and with the current inflation, what is the corpus that I should be having which is safe enough to take me through my retired life.

Mahesh
Mahesh
Reply to  Jagoinvestor
8 years ago

Confused… I am now 58 and retired 4 months back. What should be the ideal corpus that I should have at this moment to take me through my retired life? The amount of 20 to 25 crores looks very high. Please clarify.

trackback
The internet is your worst enemy: Lessons you learn when “beta-testing” retirement - Quartz
8 years ago

[…] Rs5. So you can imagine what has happened to hospital bills, tuition fees etc. Your income could be retirement funds, stocks with great dividends, a house that you’ve given on rent, a book that’ll pay […]

Suresh
Suresh
8 years ago

I am first time planning to invest in mutual funds. My goal is long term investment. I am 32 & married. I would like to start with investing Rs 10K per month in SIP mode. On reading couple of articles & some research over internet, I got to know about diversified investment where one should invest 70% in equity related & rest 30% in debt related funds. Moreover, In equity related fund, 65% should be large cap funds while rest 35% should having mid and small cap funds.

I have narrowed down some schemes for Rs 10K investment given below
3K in Franklin India Bluechip (Solely Large cap fund)
1.5K in Canara Robeco Balance(65% equity : majorly in large cap; 35% in debt, tax benefits also)
1.5K HDFC Mid Cap funds (70% contribution to mid caps)
2K in Axis long Term Mutual Fund (Multicap fund, tax benefits as well)
rest 2K in some debt related mutual fund

I am not an expert in this area, thus seeking inputs from you whether I am going in right way or not? Please give me valuable suggestions.

CHIDAMBARESWARAN
CHIDAMBARESWARAN
8 years ago

good article

Ashish
Ashish
8 years ago

Hi Manish,

One small suggestion, In this Calculator we should also have option to Fill in current savings towards Retirements so that it can help us to plan better.
(As most of ppl have PPF/EPF a/c running and we should be able to take that in or planning)

Regards,
Ashish

ashish
ashish
Reply to  Jagoinvestor
8 years ago

Manish sir, Calculators should be part of your Android App. I installed it but these are missing.

Ashish
Ashish
8 years ago

I just wanted to say Thank you for your great job.

ashish
ashish
Reply to  Jagoinvestor
8 years ago

Such a good articles needs options to share on Twitter & Facebook for our friends. Can we have this features please.

sajan
sajan
8 years ago

now my age is 41 ,after 20 years -monthly i need 20000 -whitch is the best pension plan pls tell me

Rohit
Rohit
8 years ago

Hi Manish,

My father has retired and we are looking to invest the funds he got after retirement like PF etc.
Can you please advise where should we invest?

Rohit
Rohit
Reply to  Jagoinvestor
8 years ago

Hi Manish,

Can you suggest some MF, as we see market is very volatile now a days and it looks risky.

shashi
shashi
8 years ago

dear sir
i am 45 old anď my unsaternity in the job
on hand rs 20 lakh kkhow to invest to get aprox 30k per moth as a penson

Jayden
Jayden
8 years ago

Hi Manish

Thats a wonderful article for investment and retirement. My age is 40 yrs. I already have a savings of 1.5 crores. Planning to retire in 3 years. My current saving potential is 2.3 lakhs every month from my salary. With the current saving potential every month, I will add another 80 lakhs to the existing savings. So at 43 years, I will have savings of 2.3 crores.

What would be my best option for a good monthly income, when I retire in 3 years? Is fixed deposit the best way.
Please advise.

Kalyani
Kalyani
9 years ago

I even like this option for a tenure of 20 years
HDFC Top 200 Fund(G): 8,000.00
DSPBR Small & Mid Cap Fund-Reg(G): 4,000.00
IDFC SSIF-MT-Reg(G): 4,000.00
Reliance Equity Opportunities Fund(G): 4,000.00

Kalyani
Kalyani
9 years ago

Hi,
Here are some of the funds that I am planning to use for my retirement SIP
Monthly SIP: 20,000; target: 20 years

ICICI Pru Focused BlueChip Eq Fund-Reg(G) : 11,250.00
ICICI Pru Value Discovery Fund-Reg(G): 6,250.00
Reliance MIP(G) :5,000.00
Quantum Gold Saving Fund(G): 2,500.00

Does it make any sense? I am not so much sure whether to invest in Gold Saving Fund scheme though.

Thanks
kalyani

Rajan
Rajan
9 years ago

Hi Manish,
I downloaded your monthly contribution calculator.
Also I downloaded your PPT to understand logic. I cross checked with my calculators and found values are matching and your way is simpler.
So using your formulae, I further produced inflation calculator and Reverse annuity calculator for yearly contribution (your file has monthly calculation). It means I have understood your concepts clearly (of course credit goes to you because method used for teaching was very simple).

I still have difference from my requirement from this calculator. Because your calculator gives monthly contribution amount which is fixed throughout period with % being constant.
Do you have any calculator wherein % remaining constant, if contribution amount is increased at certain % every year, goal amount is derived? or say Goal amount given and assumed % being fixed, I will get monthly contribution different for every year as my contribution will increase at fixed rate every year?

Reason behind finding such calculator is that, normally contribution should increase with more salary in hand later months of investment life instead it being constant from 1st installment.

Please help.

Yashaswini
Yashaswini
Reply to  Jagoinvestor
9 years ago

Hi Manish,
Thanks for all the help on making the formulas easy. Your calculation helps in determining how much to invest monthly to achieve your retirement corpus. But, you have not considered present savings that we already have . For example, if i already have Rs.100000 in fixed deposit and invest 1000 per month, how will my savings grow assuming a return of 10%. and how to calculate monthly contribution when you have fixed as well periodic savings. Appreciate your guidance here.

Anand Mahamuni
Anand Mahamuni
10 years ago

One of my “close friend-n-my LIC Agent” has presented me an retirement plan for my wife (age 40): Jeevan Saral – term 22, yearly premium – Rs. 72060/- and paying upto 2033
He say it has to be started in this month (aug – or latest by Sept 2013) as there would be “service charges added in all the LIC policies starting in Oct 2013” [is that really true]

Returns:
1] Retirement monthly Income – would be Rs 25300/- (age 61 – in 2034)
2] withdrawal available of Rs 42,83,305/- (age 61 – in 2034)

What do you say on this – from a view of an retirement plan?

Nimesh Shah
Nimesh Shah
10 years ago

Hi Manish,
In the example given one component is missing. Tax on the income. If Ajay is earning Rs 40,000 per month he has to pay tax and to minimise the tax outgo he has to make investments in various tax saving instruments. So this also adds up in the expenses.

Thanks,
Nimesh

SAJJAN AGARWALLA
SAJJAN AGARWALLA
11 years ago

Dear Manish,

I am very impressed by your valuable advices. Plz let me know which plan is good between lic jeevan saral and max LLPPP plan. I suppose to pay 12000/- per anumm.