Portfolio

Spend less to trim your retirement corpus

Vivek Ananth BL Research Bureau | Updated on January 14, 2020 Published on January 14, 2020

Representative image   -  istock.com/szefei

If you manage your discretionary expenses well, you’ll need to save less for your silver years

When you create a retirement corpus, you think about how much you will need to spend post retirement to maintain your current standard of living, estimate the yearly outgo based on an average inflation rate for the number of years you expect to live, and then arrive at the corpus size.

A key ingredient in creating this corpus is the type of expenses for which you are creating it. Expenses can be discretionary or non-discretionary.

Discretionary expenses are those that you don’t have to incur every month or year. Non-discretionary expenses, on the other hand, are unavoidable.

If you think that, post retirement, you can curb your tendency to spend on things that you don’t really need, or which are necessarily luxuries (non-discretionary expenses), you can reduce the corpus size considerably.

 

What is discretionary?

Identifying discretionary expenses out of your monthly expenses can be tricky. Do you really need to take your car to the multiplex that is just 1 km from your house? Do you really need to eat out twice a week?

Sometimes monthly subscriptions, such as for movies and streaming services, can also become expenses that you can well avoid. Unless you use them regularly, they can also be categorised as discretionary expenses.

Running all the air-conditioners in your house throughout the day can lead to bigger electricity bills.

You can use them more prudently. These are not just discretionary expenses burning a hole in your pocket; they might also make it necessary for you to save up more to sustain your current lifestyle.

Assessing expenses

Let’s take the example of Krishna, who is 35 years old and has a yearly income of ₹30 lakh. He has been married for six years and has a one-year old daughter. Krishna owns a house and so does his wife. His yearly expenses including taxes stand at ₹13 lakh.

Let’s see how Krishna can categorise his expenses and how that impacts the required size of his retirement corpus. The results are captured in the accompanying table.

We have assumed that he will incur expenses for his daughter till she is 18 years old. Based on his yearly savings, Krishna is planning to create a separate corpus for his daughter’s education, and we have kept that out of the calculation of the retirement corpus. He also has no loans to pay off, nor does he need to buy a house. So, these expenses have been ignored as well.

The average inflation (CPI) of the past five years for various categories of expenses have been used to extrapolate the future outgo after retirement. The plan assumes a life expectancy of 85 years. So, Krishna would need to create a retirement corpus for 25 years.

Inflation rate

The expected inflation rate after retirement is assumed at 6 per cent, while the rate of return on his retirement corpus after retirement is assumed at 6 per cent as well.

In essence, Krishna would earn enough on his retirement corpus to take care of inflation.

To maintain his current lifestyle, after accounting for inflation, Krishna will need a corpus of ₹11.5 crore at 60 years. This corpus should take care of his financial needs till he turns 85. Note that as you grow older, some of these expense heads will change as you might spend more on healthcare and less on travel, eating out, etc.

So, as you can see from the table, by cutting out his discretionary expenditure, Krishna can reduce his estimated retirement corpus by ₹1.71 crore, from ₹11.5 crore to ₹9.79 crore. Thus, if you manage your expenses well, you can also reduce your retirement corpus requirements by a fair amount.

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Published on January 14, 2020
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