Roadside coffee at Rs 300! Are you prepared for it?

Planning for retirement often figures last in the priorities for most people. We usually plan ahead and work towards the education of our children, their marriage, buying a house and even for going on holiday, and we plan about retirement only later.

Yet, if we start early in planning for retirement, the magic of compounding will greatly simplify the task of addressing longevity and inflation.

Here’s how you can make your retirement more comfortable.

A current monthly expense of Rs. 30,000 will balloon to Rs 2 lakh after 30 years, if inflation continues to average at 6.5 per cent. Sounds shocking, doesn’t it?  We all have heard our grandparents talk about a lawyer earning a ‘princely’ sum of Rs.500 a month in ‘the good old days’ and idlis costing 10 paise!

Why, even in 1983, you could get a tumbler of good filter coffee in Srirangam for 75 paise! Today, you can’t even rustle up 75 paise!

The same 75-paise coffee would have cost Rs.6.08 had inflation been 10%. Had it instead galloped at 12% the same coffee would have cost 9.20. Had inflation raced to 15%, the brew would have set you back by Rs.17.16.

The table below shows what each item would have cost at different inflation levels.

?So, back to our Rs.30,000-a-month expenses. To receive the monthly expenses of Rs 2 lakh at retirement after 30 years, you will need a corpus of Rs 4.33 crore. It should also earn more than inflation—at least one per cent. Do you save adequately for retirement? Most people don’t. Even in the U.S., few people are aware of this, as this illustration shows:

Most people feel they can manage on the lumpsum they get as provident fund and gratuity or feel their children have a ‘duty’ to protect them in their old age. And even the money that people get as retirement settlement is usually swept away in “safe” fixed deposits. What people don’t realize is that inflation will eat into it. Money kept in fixed deposits alone will not beat inflation. In fact, in the past five years, inflation would have eaten into your FD returns.

Hence it is important to beat inflation. How do you do that? By allocating assets correctly in different areas, taking into consideration the risk involved. For example, a high-risk investment that would be ok for a 20-year-old is not suitable for a 60-year-old.

Many people may feel that building a corpus of Rs 4.33 crore si difficult. Not so, if you plan in advance. To reach this target, all you have to do is save Rs 12,390 and make sure it earns a return of 12 per cent.

There are many ways to do this, and your financial planner will guide you properly in this matter.  For instance, one approach is the recently launched retirement fund by Reliance, the first of its kind.

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Salient Features of this Pension Fund

1. Compulsory lock-in of the investment for 5 years, which creates discipline among the investors.

2. To discourage you from withdrawing before 60 years, it imposes a 1% exit load if done before.

3. It lets you switch between equity and debt any number of times, which protects your corpus at adverse times.

4. You can claim up to 1.5 lakhs in Sec. 80c Investment. It is not to be compared to other ELSS, but if you want to lock in for more years and yet to have Sec. 80c, this is a good move.

5. Though it is called Retirement Fund, it does not look like any typical pension fund such as commutation and compulsory annuity plans. But it will connect you emotionally than other investments for sure.

Is this fund suitable for you? Write to me and I will let you know.