Planning for your retirement years is not straight forward as there is no one amount that suits everybody. Every individual must identify how much money they need on a monthly basis post-retirement to sustain their expenses.
It can be difficult to exactly identify the different kinds of expenses that one would incur during this period. One mistake that everyone commits is that it is assumed that the expenses will reduce considerably when they retire. However, in reality, this might not be the case.
Just because you are not working, does not mean you will start eating less or the electricity bills will go down. Definitely, there can be other expenses that will be minimized or be nil such as the expense of transportation to work, education fees for children. However, this could get replaced by the rise in other existing expenses like health care or an entirely new expense like travelling every month.
The expenses that you sustain are highly dependent on your choice of lifestyle. This is the reason that there cannot be one amount that is suitable for all. For one individual, Rs.20,000/- month is sufficient, whereas another person would require Rs.50,000.
Here, is a list of expenses that one needs to consider while planning.
Expenses can be classified into 2 categories:
1. Necessary or Basic Expenses
2. Other Optional Expenses
1. Necessary Expenses
If you own the house you are living in then, you will have to consider the various expenses associated with it. Such as property taxes, maintenance charges and, repairs. However, if you stay in a rented house, then the rental cost, maintenance, repair costs add to the post-retirement expenses.
If you own a vehicle, then the costs incurred with the insurance premium, regular maintenance and fuel costs need to be considered and if you do not, you still need to allocate some amount for renting a mode of transportation.
c. Living Expenses
This includes costs with respect to food, electricity, water, telephone, internet, clothes, entertainment (Newspaper, Subscriptions like Netflix, Amazon Prime) and so on.
d. Health Care
This is a very critical expense that most individuals under-estimate. As you grow old, the medical expenses tend to increase. It can be difficult to assess how much one might require. So, get good health insurance that can give you maximum coverage.
Here, you need to consider the medical insurance premium and also allocate some amount separately in case of emergencies where the costs have to borne by yourself.
The taxes are dependent on your income and the sources of income. Apart from this, you will also have to pay taxes on the properties that you own. This is an important expense that needs to be factored in while calculating how much you require.
f. Emergency Costs
There are various expenses that can crop up that are unaccounted. Hence, it is necessary to put aside some amount in case of situations where you have to spend more than you expect to.
2. Optional Expense
These are flexible expenses that are under your control unlike in basic expenses. This can include travel expenses, fees for hobby classes, gifting, entertainment (dining out, going for the movies), charitable donations and so on.
For instance, Ms. Ranjini wants to start investing for her post-retirement years. From this list, she can calculate her monthly requirement. The costs for each expense should be based on the same amount she is spending today or what it would cost her today and not what is assumed to be the cost of her expenses 30 years down the line when she will retire due to inflation. Inflation is considered by financial planners while estimating the retirement corpus.
At present, for housing expenses, it comes up-to Rs.12,000/- a month as rent. Regarding living expenses and transportation, she spends another Rs.15,000/- per month. She has taken health insurance for which she pays a premium of Rs.14,000/- a year which is about Rs.1200 per month. As emergency costs, she would like to keep Rs.5000/- per month. She wishes to travel once in 3 months and for that, she requires Rs.30,000/- for each trip. For other additional expenses like gifting and going out for eating, she spends around Rs.10,000/- per month.
Thus, in total she requires 12000+15000+1200+5000+10000+10000= 53200. So, her retirement goal amount should be Rs.53,000/- – Rs.60,000/-.
This is by no means an exhaustive list. There can be many other expenses that are not mentioned. This list gives you an awareness of the necessary expenses that need to be considered and from here it can be extended.
Once you have identified how much you require every month, then calculating your retirement corpus will be taken care of by your financial planner. Retirement corpus is the amount of money that you should have accumulated by the time you retire so that it can generate income that will cover for your expenses in order to live comfortably for the rest of your life.
The retirement period can last up to 20 years on average.This is the time when individuals wish to enjoy their free time, indulge inactivities they could not before. To ensure financial freedom during the retirement years, plan and start investing as early as possible. The earlier you start,the lesser amount you will have to invest. This process of planning can be time-consuming and tedious, but if this is what it takes to spend those precious 20 years of your life on how you imagined, then do not hesitate and definitely do not postpone.
If you want to know how to calculate your retirement corpus, another article about it will be coming up soon!