If you thought that a million dollar would be enough for your retirement, then this is a wake up call for you.

EXAMPLE:

Present age                                                : 40 years.

Present living expenses                                 : $ 5000 p.m.

Retirement age                                            : 65 years.

Life Expectancy                                           : 85 years

Living expenses at the start of retirement         : $27000 p.m.

Corpus at the time of retirement                      : $ 1000000

Assumptions:

 Inflation rate – 7%, Retirement corpus at 9% risk free investments. Tax implications have not been taken into consideration for the sake of simplicity.

Analysis:

You want to have the same standard of living as today even at the time of your retirement after 25 years. Your living expenses today is $5000 p.m, and this would cost you about $27000 p.m after 25 years assuming 7% inflation p.a. and would keep on increasing at inflation rate.

But you would keep your corpus in some safe fund possibly in a risk free investment during your retirement period, assume 9%. So the Real Rate of Returns would work out to 1.87% p.a factoring inflation.

Observation:

With this returns and expenses, your entire corpus may be wiped out in just over 3 years. Taxes if applicable at that time may even reduce this period. Increase in your standard of living may still reduce this period. You may be cash strapped. Revisit your strategy now before it is too late.

Strategy suggested:

You need $27000 p.m and should increase at a rate of 7% every year for the next 20 years to take care of inflation.

For this you need a corpus of $5,400,000 at the time of retirement which would be put in a risk free investment of 9% p.a.

To achieve this corpus in 25 years you may need to invest today as below:

For example: $ 164,000 lump sum OR $ 1700 p.m in an investment capable of giving net returns of @15% p.a on an average.

OR

$ 626,000 lump sum OR $ 4800 p.m in an investment capable of giving net returns of @9% p.a on an average.

The figures may vary depending on the asset class we intend to invest in and the returns expected from it.

Conclusion:

The strategy may have to be reviewed on a periodic basis and the deviations, if any, from the assumptions need to be re-aligned as required with the then present situations.

With such strategies the probability of achieving you financial goals becomes stronger and similarly it can be extended to prepare a full comprehensive financial plan that addresses other financial goals such as Education Planning, Marriage Planning, Buying a house/real estate property, Holiday/vacations, Estate Planning, Creating a contingency fund, Insurance requirement, etc. However for each goal the approach may be different in terms of investment and investment class/ asset. The chance of committing any financial mistake is almost negligible.

The author of this article is Atul Mishra, a Certified Financial Planner and a Chartered Wealth Manager, and can be reached at atulnmishra@gmail.com.