A reader asked, “What is your idea of a comfortable retirement?” A discussion.
The answer is subjective and subject to significant change especially if we are far from retirement. Perhaps only those investing for at least a decade will likely ask this question.
‘Comfort’ implies something well above a basic requirement. So let us first define the basic requirments of a retirement plan.
- It should provide an income based on your current expenses (projected at the time of retirement with an assumed inflation). Such expenses should be reviewed each year before retirement to ensure it takes into account lifestyle changes.
- Such an income should increase each year in retirement at an assumed inflation rate.
- Since increases in expenses is rarely uniform, the income should be quite flexible to handle withdrawals more/less than the normal.
- A sum should be allocated to handle emergency expenses.
The trouble is, these requirement are still quite vague. The exact details of how the income will be generated is not known. We have solved this problem using the freefincal robo advisor tool in three steps: (a) with a detailed retirement bucket strategy, (b) accounting for multiple income sources including a income flooring plan (pension = 1st year’s expenses) and (c) a laddered annuity plan.
This allows to create a personal definition of a “comfortable retirement”.
Note: I am writing this after nearly 16 years of actively investing for retirement and about six years after achieving the threshold of financial independence (corpus at least 30 times current annual income). So my definition of comfort depends on my existing corpus and its expected growth. You will have to come up your own personalised definition.
- Buy the mandatory 40% pension with NPS (in my case I cannot opt out of NPS). I expect this to cover most of my monthly expenses.
- Invest the rest of the corpus in buckets as adviced by freefincal robo tool.
- Buy laddered annuities: one every ten years or so (GOI bonds via RBI Retail direct). See this guest article: How I used RBI Retail Direct to buy govt. bonds and create an income source
- Create a robust emergency fund.
- Within in the retirement buckets, set a number for discretionary spends. If the market does well, we can use to buy anything we want.
So in summary a “comfortable retirement” is one in which I can splurge from time to time to my heart’s content and do not have to worry about hospitalization expenses, gadget replacement or upgrade costs. To achieve this I would aim for a corpus large enough to afford laddered annuties and then use a bucket strategy to fund remaining needs and wants.
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Dr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.
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