Two mistakes while planning for retirement

1. Not considering Inflation
2. Not considering increased life expectancy

Inflation causes things to cost more in the future, so as a general rule, expenses increase over time. Add to this that most of us are living longer, and the need for a substantial retirement corpus becomes a necessity.

Suppose you plan to retire when you are 50 years old, and currently, you are 25 years old with monthly expenses of Rs. 40,000.

As a result of inflation, your monthly expenses will increase when you retire 25 years later to Rs. 1.35 lakh monthly, i.e., Rs. 16.2 lakh annually (at 5% Inflation). This is the minimum you need post retirement when you will have little or no income due to increased life expectancy.

Considering if you live till 70 you’ll need 3.25 crores as retirement corpus. 75 years - 4.05 Crores, 80 years - 4.86 Crore

Now the question comes - increase in the cost of expenses post retirement?

Yes, expenses would increase post retirement at the same rate. This would be covered by the interest earned on corpus every year. Let me explain it to you with the help of an example

At the age of 50 you have a retirement corpus of 3.25 crore. Now you withdraw 16.2 lakh (1.35 x 12) for annual expenses.

Balance left in the retirement corpus - 3.08 crore. This amount will be kept invested in a very safe and liquid asset (like bank savings account or fixed deposit) and will generate interest (assuming the lowest @ 3%)

Balance of corpus after a year would be 3.18 (3.08 crore + 9 lakhs as interest)

In the second year - now you withdraw 17.01 lakhs (expenses increased due to inflation)

Balance left - 3.01 Cr

Balance in corpus after a year would be 3.10 (3.01 Cr + 9 lakh interest)

Similarly, with the reducing balance, one can make sure they have enough till needed.

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