Last Updated on October 10, 2024 at 7:26 am
Before getting started, let us try to understand the meaning of the term ‘retirement corpus’. Then, we will move on to discuss the four things that can make a dent in your retirement corpus.
About the author: Ajay Pruthi is a fee-only SEBI registered investment advisor. He can be contacted via his website plnr.in. Ajay is part of the freefincal list of fee-only advisors and fee-only India.
Also by Ajay
Meaning of “Retirement Corpus”. Although the term ‘retirement corpus’ may sound somewhat complex, its meaning is very simple. Retirement corpus refers to the total amount of money which you’d require after retirement for your living expenses. The purpose of such a corpus is to provide for family sustenance till the time you and your spouse live. Yes, it’s meant for both you and your spouse as one may outlive the other. To facilitate a better understanding of the concept, let me take a real-life example.
Suresh is 35 years old and his wife is 2 years younger than him. He wants to retire at age 60 with a provision of 50,000/- month as per today`s cost trends. The monthly provision he wants would allow him to lead a happy retired life. Besides, he assumes that he and his spouse would live till the age of 85. But is this data enough to calculate the retirement corpus – The answer is a big NO!
We need to consider certain assumptions to calculate the retirement corpus which would be required at age 60. The calculation would be done considering retirement corpus which would give Suresh a monthly income of 50,000 (inflation-adjusted).
Inflation-adjusted 50,000 per month in this case means (Assuming the rate of inflation as 6%):
- Expenses after the 1st Year of retirement would be 2.15 Lakhs per month.
- Expenses after the 2nd year of retirement would be 2.28 Lakhs per month.
- And the same will continue…
Assumptions
Rate of inflation – 6%
Returns over inflation after retirement – 1%, i.e. if the inflation rate is 6%, the rate of returns would be 7%.
Value of 50,000 after 25 years of Suresh`s Retirement – 2.15 Lakhs (at 6% inflation).
Corpus required to sustain till age 85 – 6.15 Crores.
Let us say, Suresh, achieves this corpus of 6.15 Crores at the age of 60.
Now, what are the 4 things that can make a dent in his retirement corpus? Let’s find
Health Insurance Nowadays, it cannot be denied that hospitalization costs are on the rise. The various medical expenses are going up like anything. People are unwilling to take a separate health insurance cover since they’re covered under their employer health insurance scheme. The reason for the same is very simple and straightforward. People pose arguments like – Why spend an additional amount of 15000/20000 when we are already covered by our employer?
What they fail to understand is that this expense is for their safety in the future. You are not going to remain healthy throughout your life (though exceptions are always there). Hence, at some point in time, you will require health insurance. It may be due to old age when you have no employment. Or it could be that your new employer while changing jobs isn’t providing you with the same amount of cover.
Let’s take the example of Suresh once again who didn’t buy any health insurance cover till age 60. When he approached health insurance companies at age 60 to buy a cover for his family, his requests were denied. Just for the reason that he was suffering from high blood pressure and diabetes.
He got admitted in the hospital within 3 months of his retirement and the hospital bill was around 21 Lakhs.
How come the amount is 21 Lakhs? Have you gone mad? I have assumed the total cost of hospitalization bills as 3 Lakhs as per today’s cost trends. With 8% inflation, it would cost around 21 Lakhs only. And trust me, 8% inflation in health insurance sector is still on the lower side.
If Suresh subtracts this amount from his retirement corpus, he’d be able to spend Rs. 48,000 till age 85 (in today`s cost). The meager amount of Rs. 2,000 does not seem to make much difference in this case. But just think what would happen if these hospitalization expenses were to come again, again, and again.
In addition to all that, people have other arguments too. What if I invest the premium amount in equity mutual funds and create a corpus for a medical emergency? The point is highly valid. Now let us assume that Suresh is paying a premium of 15,000 every year. Plus, the premium amount increases by 5% every year. He invests the same in equity mutual funds assuming a return of 10%. The medical emergency corpus would be around 25 lakhs after a time period of 25 years. Now, considering the scenario in the above-mentioned example, 25 lakhs will vanish in a single go. How will you manage to medical emergency create a corpus for the next year?
My point is, if health insurance is not taken, it can undoubtedly make a big dent in your retirement corpus. Take one now. Even if you are covered by your employer, consider taking one for your retirement days.
Returns Over Inflation
I have assumed returns over inflation at 1% in the above example. But what if there are no returns over inflation? Suppose there is no return over inflation, i.e. the rate of returns and inflation are same. Here, the retirement corpus required would be around 7 Crores. And that is 90 Lakhs more than the previous case.
So, If Suresh accumulated a corpus of 6.15 Crores assuming 1% returns over inflation and the actual returns are 0% above inflation. In this case, Suresh cannot afford to spend 50,000 per month. As a consequence, he would have to reduce his expenses to 44,000 per month (inflation-adjusted).
And if Suresh continues to spend 50,000 per month, his retirement corpus would exhaust earlier.
Taxes
Now, this is a very grey area. Speaking of tax-deductions on 7 Lakhs today, you may not have to pay any tax on 7 Lakhs income. But would it be the same case after 25 years? Would there be no tax-deductions on an income of 25.8 Lakhs per annum? I highly doubt it. As to how much tax-deduction would be allowed, I am not sure. But the taxes will definitely make a dent in your retirement corpus.
That is the reason why asset allocation is so necessary. Investing in instruments like PPF can help you to withdraw some amount of money without paying any tax. But there’s no surety as to whether PPF would be tax-free at that point of time. Still, it’s preferably better to invest in instruments which can provide you with tax-free income.
Life Expectancy
What if I or my spouse survives beyond 85 years? How would I manage things in such a situation? Would I have to be dependent on my children for my monthly expenses at that point in time? With the increasing longevity, this is that one thing which can definitely make a dent in your corpus. In fact, you won’t have any corpus at all if you survive beyond your expected longevity.
Is there any solution to this? Yes, there definitely is!
When you’re investing the required amount for your retirement corpus, you should do some additional investments for an emergency corpus. Like in the above-mentioned case, you can create an emergency corpus of 1 Crore by investing 8,000 per month. Nonetheless, don’t touch the corpus even after retirement, unless and until it is really required.
As of now, this is the only solution I can think of for avoiding any dents in your retirement corpus. If you have a better solution in mind, do let me know by commenting your thoughts below. Till Then,
Happy Investing & Keep Investing!
*Disclaimer- Nothing contained in the article is a solicitation, recommendation, endorsement, or offer by me. If you have any doubts as to the merits of the article, you should seek advice from an independent financial advisor. Registration granted by SEBI, membership of BASL, and certification from NISM in no way guarantee performance of the intermediary or provide any assurance of returns to investors. Investment in securities market is subject to market risks. Read all the related documents carefully before investing.
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