Major Expenses Of A Retired Person
A retired life means that you have to live your life with limited or no income keeping all the expenses constant. Well, that seems really difficult. That is the reason why you need to build a retirement corpus. However, there are a few factors to consider. But before we discuss all the factors, first let us discuss the major heads of expenditure post-retirement.
The following types of expenses are the ones that retired persons will have to cover with their limited funds-
Which Factors can Affect Your Retirement Corpus?
The following factors can affect your decision of how much you want to save for your retirement-
i. Standard of Living
Your retirement corpus is used to generate a monthly income for you in your retirement. So, its size is directly proportional to the monthly amount that needs to be generated. The higher your standard of living, the more you would need each month in your retirement. This means you would need a higher retirement corpus, which in turn means that you need to save more every month while you are earning. You can roughly calculate how much you would need in your retirement from your current monthly expenses. Of course, you would have to factor in inflation, and it would give you a rough idea about your needs in your retirement.
Inflation is an important factor when extrapolating today’s monthly expenses to your post-retirement expenses. For doing this, you would use the compound interest formula and the most important factor there is the expected rate of inflation between now and your retirement. A higher rate of inflation means that you would need more money to maintain the same standard of living, resulting in a higher retirement corpus – which means you would need to save and invest more every month today.
iii. Income Expected in Retirement
Of course, if you have any other income in your retirement, that would reduce the need to generate additional amounts. This can be anything, say pension or rental income from your second flat / apartment or even small earnings from your hobbies. Basically, if you have income in any form during your retirement, your retirement corpus would be lower, which means less investment needed while you are earning.
iv. Rate of Returns / Interest Rate
The rate of return comes into play at two stages – for building your retirement corpus, and for generating the monthly income from your retirement corpus. This rate of return also directly depends upon the instruments you choose for investment while saving for your retirement, and the instruments you choose to park your retirement corpus in.If the rate of return is high during your earning stage, you would need to invest less every month. This would be the case if you are investing in instruments like shares/ equities. On the other hand, if you are investing in safe avenues like bank FDs and endowment plans of life insurance companies, the amount you would need to save every month to generate the same retirement corpus would be higher. The rate of interest post-retirement is crucial in calculating the actual retirement corpus. If you would be parking the retirement funds in safe avenues generating steady income (like most people should do), the retirement corpus needed for you would be higher, resulting in higher monthly investment requirements today. But if you can invest even some portion of your retirement corpus into high yield avenues like stocks, you would need a smaller retirement corpus, thus needing lower monthly investments today.
v. Years Remaining to Retirement
This determines how long you can save and invest to build your retirement corpus. The earlier you start, the lower you have to invest every month.
vi. Life Expectancy
The retirement corpus has to provide for your entire retired life when you are not earning. Therefore, your life expectancy plays a big role in the calculation of the retirement corpus. The higher the life expectancy, the higher is the number of years for which your retirement fund needs to last and provide for you. Therefore, the higher would be the retirement corpus, and higher would be the amount you would need to set aside for your retirement. Deciding what amount you should set aside for retirement is a complex exercise, and the above mentioned factors should help you get an idea about the amount of investment needed for building your retirement. Of course, you can also take professional help from a financial planner.