Primer. It’s more than just numbers

Life expectancies are increasing, thanks to better healthcare. But the flip side to living longer is that you have a greater number of years without a fixed source of income. Now, most of us look at retirement calculators available on the internet to arrive at the corpus we need.

True, most of these calculators aim to provide a number that one needs to reach and the amount to be invested regularly. Though this is a good start for basic estimations, there are qualitative aspects to saving for retirement which should be taken into account too. Let us try to understand these aspects with a hypothetical situation.

Akshay and his wife are a working couple, both 30 years old. Akshay has no siblings. His parents are independent and live in a different city. Nitesh is 40. His family includes his parents, wife, two kids and a sister who is a special child and will need life-long support. Both families have a monthly expense of ₹75,000. Both will retire at 60. A younger person will need to accumulate a higher corpus, but that will be achievable with a smaller investment. Based on same assumptions of inflation and rate of return for both, Akshay will need to accumulate ₹20.29 crore to support his retirement while Nitesh will need ₹9.40 crore.

Assuming a 15 per cent rate of return, Akshay will need a monthly saving of approximately ₹39,000. Nitesh will have to save ₹76,000. So we now have a number for retirement (which you will be able to get out of retirement calculators). But the capacity to save matters more.

Akshay probably might be able to allocate the amount as he has fewer responsibilities, but it might be tough for Nitesh.

He has more dependents and lesser investible surplus, as his spouse is not working. The huge savings requirement may stress him out or he may stop saving if he feels it is futile.

So, for those identifying with Nitesh, instead of being intimidated by the huge requirement, they should start off small and increase savings gradually.

The second point in deciding on savings is whether one has other assets to draw on. In our example, Akshay is likely to inherit assets in the normal course of things. Not so for Nitesh. The availability of other assets to fund one’s retirement will reduce the monthly savings required. The third factor in savings is discipline. Indulgent splurging can leave you with lesser amounts to invest in. Your investments will become irregular and ad hoc; achieving your goal will be difficult.

In our example, Akshay may be more likely to stray off the path as he has few responsibilities at the moment.

Quantum of savings aside, risk tolerance will decide into which asset classes your investments will go. To reach an annual return of 15 per cent in our example, investments need to go into growth assets such as equity and real estate.

Instead, if Akshay puts most of his savings in fixed deposits, which have far lower returns, he may not be able to achieve his goal even if he needs to save a lower amount than Nitesh.

You will also have different goals, apart from retirement, towards which you need to save. One of the key goals for Nitesh is to support his sister.

Hence, his savings will be allocated towards many goals. For Akshay, his life might follow a normal pattern as long as the situation remains the same. Should he or his wife take a sabbatical if their family grows, goals and numbers will need to be reworked. It is essential to review your retirement corpus as circumstances change.

You accumulate your retirement corpus over your working life. This corpus needs to generate income for your retirement. But because the amount needed is calculated decades in advance, a lot depends on the situation at the time you retire.

It’s hard to guess what products will be available at this time which you can invest in, and what yields these products will generate. The products and yields will affect the income your corpus generates. A mismatch between your assumptions and reality can throw a spanner into the works.

So, having a little extra in the retirement kitty can help if return assumptions don’t pan out as expected during retirement.

The writer is a SEBI Registered Investment Advisor and a member of The Financial Planner’s Guild, India www.fpgindia.org

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