Saturday, May 31, 2008

Retirement Planning

I feel childhood is the best period which you can go through during your life. You are just born and everybody comes and meets you, play with you, entertain you (or probably you entertain them), give you toffees, candies, cookies, toys and everything that you love. The only problem with childhood is that you don’t remember that period of your life when you grow up. By the time you are big enough to know what’s happening around you, you start going to school and just when you were beginning to enjoy that period you get increasingly heavier doses of homework that it leaves you little time to play. But that is still better as compared to your adult life since you can play an hour or two a day whereas in adulthood you don’t even get time to that.

The second best period of life comes when you go to college. That is the age when you have friends with you, you are big enough to venture out alone with your friends and are not under the constant watch of your parents’ eyes. Once you finish college and start working, life is all downhill. Sure, there are milestones which you enjoy like your first salary, your first music system, your first …. oops, I mean, your marriage and your first child, your dream vacation, your dream house, your 60th birthday and then your retirement. That is the time when you think that you are free from all responsibilities and that you will live life king size. But how often does it happen? Did you know that 60% of the people endure retirement rather than enjoy it? And that is because they don’t plan their retirement well.

One has to plan for one’s retirement early in life and the more you delay the planning, the more you will suffer in your old age. Things are becoming costly. Inflation, which was just between 3-4% a few of months back, is now well over 8%. You can see the price of petrol. I remember the cheapest petrol that I have purchased was Rs.21/- per litre. Now it is touching Rs.46/- (in Delhi. In Mumbai it is past Rs.48/-). Let us just do a simple calculation. You want to buy a LCD TV which costs between Rs.30000 to well over a lakh. Let us assume you plan to buy a Rs.35000/- LCD TV but then you think it is better to buy it when you retire rather than now. And you save Rs.25000/- now thinking that the LCD would probably cost Rs.80000/- by the time you retire and during the same time, your investment of Rs.20000 would also probably fetch you Rs.80000/- and you would be able to buy it. Let us say your retirement is 30 years away. But can you guess what would be the cost of the LCD 30 years from now assuming an inflation of 5%? It will be almost Rs.152,000/- and Rs.246,400/- 40 years from now.

You spend Rs.40000/- a month now and you think after retirement you would reduce your monthly expenditure to Rs.20000/- and for 20 years after retirement you would probably need Rs.50,00,000/- at today’s prices and probably Rs.80,00,000/- assuming inflation. If your retirement is 40 years away, you would need Rs.65000/- a month to buy what costs Rs.20000 today, assuming only 3% inflation. And to sustain through the 20 years after retirement you would need a corpus of Rs.2.1 crores. Do you ever do the calculations and plan how to meet the shortfall.

It is better to start saving early. I would say, as early as today. Every day of delay costs you. I read a very
nice article by Mr. Gaurav Mashruwala, a Certified Financial Planner, who says that Vikram started investing Rs.10000/- every month in an instrument giving 8% guaranteed returns per annum in Jan 1991 while his friend Rohit started investing the same amount in the same instrument in Jan 1992, exactly one year later. In Jan 2001 when they saw their corpus, Vikram had built a corpus of Rs.18,29,460/- while Rohit had only Rs.15,74,295/-. His one year delay cost him Rs.2,55,165/- whereas his investment was only Rs.1,20,000/- less than that of Vikram.

That does not sound too grave a mistake. Let us take another example. Let’s say there is a girl who is 21 years old who started investing in a retirement plan that gives her 10% return per annum. She invests Rs.10000/- every month till the age of 36. At 36, she stops investing and lets her money lie in the retirement fund till the age of 60. Her friend, who is a boy, started working at the same age as her but then he first bought a music system, then a bike and then a car. He started investing at the age of 35, which means 14 years later. To make up for the delay he starts investing Rs.25000/- every month and he continues his investment till the age of 55. At 55, he stops investing and leaves the money in the retirement fund till the age of 60. By this time the girl has invested Rs.19.2 lakhs while the boy has invested Rs.63 lakhs. Who do you retires with more money? Well, the girl retires with Rs.4.67 crores while the boy gets only Rs.3.4 crores.

That’s what an early start can do for you and that’s how grave a mistake you can make by delaying your investments. So, start investing now. It is not advisable to waste even a day to invest.

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