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Op-Ed

Retirement plans

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By EMN Updated: Mar 13, 2014 10:43 pm
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Dipankar Jakharia

[dropcap]A[/dropcap]fter dinner one evening, my friend Ravi tried to explain how a big black telephone with a rotating-dial looked like.
“It used to have a rotating-dial, to dial the numbers, and the mouthpiece was separate from the base set, and was connected with a rotating wire”, said Ravi
“If it didn’t have buttons on it, how did you send your text messages across?” asked my ten-year-old.
Seeing Ravi’s predicament, his wife, Asha, exclaimed, “How rapidly things change! To make our children understand how things were twenty years back, we might have to visit a museum very soon.”
“Agreed!” said my wife, nodding her head from left to right.Amidst all this, my daughter came to the rescue, “Ravi Uncle, don’t worry, I’ll Google and see for myself”.
“I am already feeling like a dinosaur, and I am yet to touch forty”, Ravi said, conceding defeat.
“I wonder where will we be in our retirement years? I hope our children don’t throw us out of our homes like expired medicine”, Ravi said jokingly.
Technological advancement and its impact on the society and our lives are evident. There is another form of social change which is rapidly transforming our lives and the way we look at it. Our social security is dependent on the structure of the family. And till a few decades ago, a man in his sunset years used to rely on his sons and daughters. But now, with the world becoming a global village, providing us with unlimited opportunities, parents want their children to look for greener pastures and not worry about them.
Ravi added, “I have already started to save for my retirement, but with the back-breaking inflation, I don’t know if I am saving enough!”
“This question of saving enough pops up frequently whenever we keep aside the monthly savings”, Asha admitted. Although there are different methodologies used by a financial planner, today, I will explain a simple one.

For example, let us see Ravi and Asha’s household budget:
Food : Rs. 10,000
Mobile/ Internet : Rs. 2,000
Electricity : Rs. 2,000
Entertainment : Rs. 4,000
Children’s education : Rs. 6,000
Medical : Rs. 1,000
Hose & Car EMI : Rs 20,000
Miscellaneous: : Rs. 5,000
Total: : Rs. 50,000
So, monthly expenses of Ravi, who works in an MNC and Asha, a teacher in a government college, would amount to , say, Rs. 50,000. But, will they have the same expenses in their retirement days, which is more than twenty years from now? If they had to retire today, what would their monthly budget look like?

Food : Rs. 6,000
Mobile/ Internet : Rs. 1,000
Electricity : Rs. 1,500
Entertainment : Rs. 1,000
Children’s education : Rs. 0
Medical : Rs. 5,000
Hose & Car EMI : Rs. 0
Miscellaneous: : Rs. 2,000
Total: 16,500
If you compare the aforementioned lists, you’ll find a decrease in certain expenses and increase in old age-related expenses. This would be the figure considering today’s cost of living. So, what will be the cost at the time of their retirement, which is, say, twenty years from now? For this calculation, you will need a simple a calculator.
Monthly cost of living : Rs.16,500
Yearly cost of living: 16,500X12= Rs. 1,98,000
So, the couple will need nearly Rs. two lakhs per annum. Let’s assume an inflation rate of seven per cent for our calculation. Now, press 1.07 and the multiplication symbol (X) twice on your calculator. You will notice a small K appearing on the screen. Now, multiply it with 2,oo,ooo and press the “equal to” symbol (=). Don’t stop there, keep pressing the symbol for a total number of twenty times. The figure on the screen will give you a calculation of two lakhs compounding for twenty years at seven percent. And which is Rs. 7,74,000.
So, Ravi and Asha would be needing an amount of, say Rs. 7 lakhs, 75 thousand per annum at the time of retirement as living cost. If we convert this to a monthly ratio, it turns out to be around Rs. 65,ooo.
Now, on another reverse calculation, we find that if the couple has a corpus of Rs. one crore at the time of retirement, they will have a ready flow of the required monthly cost of Rs. 65,000 by simply putting the money in a fixed deposit and earning eight per cent per annum. It’s as simple as that!
All this calculations brought a smile on Ravi’s face. Although Asha was still confused, she listened intently to Ravi.
“You know what? To achieve my target of Rs. one crore, I have to invest only Rs. 10,000 per month, with, an expected return of 12 per cent. And I’m already doing it!” he exclaimed with a smile.

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By EMN Updated: Mar 13, 2014 10:43:48 pm