Retirement does not necessarily have to mean working till 60 or the maximum edibility age of your company. Provided you have put away enough funds, you can take an early retirement or a VRS, or just try and figure out if you currently have enough to retire from your current occupation.

It is at this stage that you build your retirement and estate planning strategies. Let us delve further into this, and understand the dynamics of 'income support mathematics'.

Your strategies depend on two important factors:

• The age at which you can retire out of work
• If your savings are enough to let you retire today.

These factors are in turn dictated by the following parameters:

• The income support you seek
• The savings that you have
• The investment budget that you currently have
• The time frame that you have to retire
• The rate of inflation
• The risk you wish to take during retirement
• The risk you wish to take before retirement

The following chart illustrates the impact of the last two factors.

Table A
Current age	40 years
Retirement age	60 years
Expected life	80 years
Inflation	7%
Current Income	Rs 50,000 p.m.
Investment budget going forward (We assume that there is no previous provision made)	Rs 10,000 p.m.
Retirement income required (accounting for inflation & reduction in lifestyle expenses)	Rs 100,000 p.m.
Post-retirement investment return	9%

Here is the analysis based on parameters 6 & 7 above, ie, based on the level of risk you are willing to take:

 

Strategy Option	Risk being taken now	Rate of return to be obtained now	Rate of return to be obtained post retirement	Risk level required post retirement
1	Very High (Very Difficult)	18.25%	6.00%	Negligible Risk
2	Quite High	15.00%	11.00%	Low to moderate
3	Moderate	12.00%	16.50%	Very High
4	Low	9.00%	23.00%	Only Warren Buffet has achieved this year after year
5	Negligible Risk	6.00%	31.50%	It is ridiculous to expect returns in excess of 30% year after year!
Note: return levels of 14% and upwards imply a 100% equity portfolio

(Note: return levels of 14% and upwards imply a 100% equity portfolio).

What does the above table mean?

Very simply, we are in a situation where you can save just 10,000 pm towards retirement. We seek to have an income of Rs 100,000 pm increasing annually at 7%. We have five strategy options presented before us depending on the level of risk we plan to take.

To elaborate further, if we take high risk now, ie, expect to earn 15%, we may need to take low to moderate risk during retirement.

The rate of returns you need to earn post-retirement is key to deciding the strategy you implement. Building further on the idea of 'income support mathematics,' I will explain the dynamics of how much more wealth you need to create given the amount of savings you have accumulated.

Take the example of Mr X (Table B):

In order to have Rs 100,000 income per month post-tax, increasing each year by 7% on account of inflation, the corpus he will require is about Rs 2.2 crore (Rs 22 million). This means that in the next 20 years, he must build up a corpus of Rs 2.2 crore (or Rs 220 lakh) to retire comfortably.

This money is just about enough and will become zero when he reaches 80.

What does the above table mean?

This is just a situation where Mr X can save Rs 10,000 per month towards retirement. We seek to have an income of Rs 100,000 per month increasing annually at 7%.

We have six strategy options and three scenarios with respect to existing savings of Rs 2 lakh (Rs 200,000), Rs 5 lakh (Rs 500,000)and Rs 10 lakh (Rs 1 million).

The strategy option Mr X must choose depends on the amount of savings he currently has and the level of risk he is willing to take, going forward.

To elaborate further, as per options one and two, if he has just Rs 2 lakh of savings, retirement would be a nightmare for him. Even taking high risk now, he will not be able to create his retirement corpus. Besides, he does not have the monthly budget provision required.

As per options three and four, he will be in a position to retire comfortably only if he is willing to invest Rs 5 lakh into high risk assets and stretch his monthly budget to Rs 11,500, if he is in a position to retire comfortably. Thus, option four is feasible.

As per option five, even if he has Rs 10 lakh of savings, he cannot retire since does not have the provision to invest Rs 25,000 every month. But if he decides to take a higher risk, he will not only be able to retire comfortably but also afford international holidays every two years, or a luxurious domestic holiday each year.

In all the above, we have assessed that he will earn a post tax return of 9% during his retirement years. Of course, the time frame you decide has a huge impact on the income support mathematics.

Moral of the story: it is not your fault if you are born poor, but if you stay poor, it certainly is!

Kartik Jhaveri, an expert at Financial Planning, is a Certified Financial Planner and a Chartered Wealth Manager.

Disclaimer: The contents of the above articles are the intellectual property and copyright of the author, Kartik Jhaveri. No part may be used or reproduced in any form or manner. If you choose to act upon the information contained in the above article it is at your own risk. This article is purely educative and you are strongly advised to consult an expert prior to taking any significant decision.