RETIREMENT PLANNING

Steps of Retirement Planning

1. Develop your retirerment goal

2. Analyze your retirement needs
3. Estimate your retirement income
3 (A) Measure your existing Retirement Income
3 (B) Estimate total retirement income required
How much income should be earned at the time of retirement to meet the regular expenses?
i) Replacement Ratio Method
ii) Expense Method

i) Estimate ratio or fixed % of last drawn salary.

Example: His last dwarn salary is Rs 30000 per month and he would need income of atleast 70% of it.
How much income is needed every year post retirement?
252000 SCSS give a return of 8% pa.
Retirement Corpus = 252000/.08 3,150,000

Problem in Replacement Ratio Method to calculate Retirement Corpus

Given:
Current Age = 25 years
Plan to retire = 55 years of age
Current Annual Salary = Rs 6 lakh pa
Expected annual growth in salary = 6%
Need 70% of last drawn salary to meet his post retirement expenses
Post retirement SCSS to give a return of 7% pa
Calculate Retirement Corpus that the client needs at the age of 55 years

Solution:
1. Calculate FV of current annual salary
FV 3446095
2. Calculate income needed at the time of retirement
2412266.29262
3. Calculate retirement corpus
34460947.0375
If he invest today in a SIP of a large-cap mutual fund, it expected to generate a return of 10% pa
How much he should invest every year to get the retirement corpus?
FV of Annuity = Annuity * FVAFn,i
FVAF 164.494
Annuity 209496.7

ii) Expense Method

1. Estimate Retirement Corpus
i) See current regular expenses and deduct expenses which will not be incurrend post retirement and Add expenses health exp
hobbies
ii) Estimate average inflation rate
iii) FV of expenses plus annual vacation , health expenses
iv) Net expenses or Net income required = iii) - Income at the time of retirement
v) Calculate Retirement Corpus = iv)/Expected Return post retirment
vi) Total Retirement Corpus = v) + FV of One time expenses
vii) Calculate Annuity to achieve the net retirement corpus
tleast 70% of it.

OR Retirement Corpus = (252000 - Existing Retirement Income)/.08

Add expenses health expenses, vacation expenses,

Net Retirement Corpus = Total RC - (FV of PPF + FV of NPS + FV of EPF)

 Kunal kapoor, aged 30 years, wants to retire at the age of 60 years. His current expenses Rs.6 lakh p.a.
includes insurance premium and child education fees of Rs. 1 lakh and Rs.50,000 respectively. The current
expenses are expected to increase at the rate of 5% p.a. till retirement. On retirement, he would like to
indulge in pursuing his hobbies like travelling, which will amount to Rs.5 lakh p.a. after retirement. He has
adequate health insurance cover to take care of his medical expenses after retirement. He will draw a
pension of Rs.30,000 per month and a rental income of Rs.20,000 per month. The rate of return expected at
the time of retirement is 8% p.a.
Compute how much he should invest on annual basis in an equity mutual fund to build his retirement
corpus. The equity mutual fund is expected to give a return of 12% p.a.

Solution:
Current Expenses 600000
Less: Insurance premium 100000
Education fees 50000
Net Current Expenses 450000

Future Value of Net Current Expenses

FV 1944874.068818

Total Expenses at the time of Retirement 2444874.068818

Net Income required post retirement

Total Expenses at the time of retirement 2444874
Less: Pension(30000 x 12) 360000
Less: Rental Income (20000 x 12) 240000
1844874

Retirement Corpus 23060925

Caluclate Annuity to achive the retirement corpus

FV of Annuity = A * FVAFn,i
FVAF 241.33268
Annuity 95556.576
es Rs.6 lakh p.a. pre retirement expenses
ectively. The current C.E. 600000
he would like to - child education 100000
retirement. He has
He will draw a - Premium 50000
of return expected at Net Expense 450000
FV 1944874.07
d his retirement
post retirement expense 500000
Total Expenses 2444874.07
expenses after retirement 1844874.07
RC 23060925.9
FVAF 241.332684
Annuity 95556.5796