Dubai: As a non-resident Indian (NRI), you have many retirement decisions to make in order to retire comfortably, and this is why you need to plan your finances if you want to make this dream a reality.
What’s unfortunately becoming even truer is that off late the so-called status symbol of ‘crorepati’ is not rich enough for a long, simple retired life. (Rs10 million translates to Rs1 crore i.e. about Dh500,000)
Retirement planning can be summarised as two aspects: save as much as you can and invest as well as you can.
But the amount of savings you’ll actually need to retire comfortably depends on your expenses, your lifestyle and your individual financial goals.
So taking a big-picture approach to your retirement can help you determine a savings target that works for you.
FAQ #1: How much should I have saved for retirement?
First, you need to know how much money you will require post retirement for a comfortable life.
This depends on two things; at what age you are going to retire, what's going to be your monthly expenses post-retirement.
CASE STUDY #1
Let’s consider these assumptions:
• Current age: 35 years
• Monthly expenses: 29,000
• Inflation considered: 6 per cent
• Retirement age considered: 55 years
• How much you may live post-retirement: 80 years
Here's how you get to the amount you will need:
Step-by-step breakdown: How do I figure out my annual and future expenses?
At the first step, you need to know your current annual expenses: Let’s say if your monthly expenditure is Rs29,000 (Dh1,393), then annual expenses come out to be Rs348,000 (Dh16,726) (i.e. 29,000 multiplied by 12)
The second step is to know your future expenses: At a 6 per cent inflation rate, your annual expenses post retirement will Rs1.1 million (Dh52,870) per year.
In the last step, we have calculated the corpus required to fund your retirement expenses post-retirement:
As we have considered your retirement age is 55 years, and life expectancy (average age period that a person may expect to live) is 80 years, with the above assumptions, you will have 25 years post your retirement.
And, if you invest your retirement money in a traditional or safe product which provides you 9 per cent annual return, and inflation remains the same, then the net interest you’ll be receiving around 3 per cent every year.
With the calculations mentioned above in mind, you will require a corpus (total money invested) of Rs22.5 million (Dh1.1 million).
At first, this amount may look huge to you, but it’s possible for those who prepare for it step by step. Since your goal is at least 20 years away, start a periodic investment plan (SIP or systematic investment plan) in a mutual fund specifically to collect money for your retirement and you are set.
FAQ #2: What if I don’t have that many years to retire?
Let’s say you don’t have that many years to retire, and you have just another 10 years to retire with about Rs10 million (Dh480,638) in savings currently. Let’s analyse what you can do.
CASE STUDY #2
Let’s consider these assumptions:
• Current age: 50 years
• Current savings: Rs10 million (approx. Dh500,000)
• Investment rate of return: 10 per cent to 12 per cent
• Retirement age considered: 60 years
• How much you may live post-retirement: 80 years
Let’s consider the case of a 50-year-old NRI with a starting corpus of Rs10 million. To grow Rs1 crore to Rs6 crore in 10 years, by the time he or she is 60, requires a compounded annual growth rate (CAGR) of 20 per cent (19.62 per cent, to be precise).
A required rate of return of 20 per cent is too high and one cannot plan on getting such a return. This corpus is just not sufficient to create the required corpus.
If the starting corpus were higher, say, Rs20 million (Dh961,277) to Rs25 million (Dh1.2 million), it would grow to Rs60 million (Dh2.9 million) at an annual rate of 9 per cent to 12 per cent (9.15 per cent to 11.62 per cent to be precise).
This required rate of return, calculated in Indian Rupee terms, looks reasonable and feasible if the corpus was nearly fully allocated to equities.
The NRI with starting corpus of Rs10 million (approx. Dh500,000) can still build the required corpus but would have to make significant contributions to it during his remaining working life of 10 years.
He or she can start doing a periodic investment plan to the corpus. Assuming a 10 per cent to 12 per cent return over the period, the investment plan amount would have to range from Rs100,000 (Dh4,806) to Rs150,000 (Dh7,209) per month to achieve the required corpus.
However, one does not know what the future returns from any asset class over such long periods of time would be.
In summary, if a 50-year-old NRI starts with a corpus of Rs25 million (Dh1.2 million) or with a corpus of Rs10 million (approx. Dh500,000) with a monthly period investment of Rs100,000 (Dh4,806) to Rs150,000 (Dh7,209); in both cases, investing it in equities.
FAQ #3: What if I keep investing in safe investments till I retire?
Let’s say your risk tolerance level is low, and you cannot afford to invest in the stock markets, and instead prefer to invest in the so-called safest investment avenue known as ‘fixed income’ investments. Let’s analyse what you can do.
Government or treasury bonds and bills, municipal bonds, corporate bonds, and certificates of deposit (CDs) are all examples of fixed-income products.
A certificate of deposit (CD) is a savings account that holds a fixed amount of money for a fixed period of time, such as six months, one year, or five years, and in exchange, the issuing bank pays interest. When you cash in or redeem your CD, you receive the money you originally invested plus any interest.
CASE STUDY #3
• Current age: 50 years
• Current savings: Rs25 million (Dh1.2 million)
• Investment rate of return: 4 per cent
• Retirement age considered: 60 years
• How much you may live post-retirement: 95 years
Assuming you had around Rs25 million (Dh1.2 million) and you invested it in fixed income investment products yielding 4 per cent net of taxes in India you would end up with Rs37 million (Dh1.7 million) in 10 years’ time.
Assuming you wanted your corpus to last you until the age of 95 years, or at least you wouldn’t want to run out of money at age 85 or 90, this amount would be sufficient for spending around Rs25,000 (Dh1,201) per month, or Rs300,000 (Dh14,419) per year, assuming you already have a house you own.
Contrary to public opinion, financial planners agree that it is possible to live in India on that amount as well. It is just a relatively less affluent lifestyle.
What can be clearly said is that if you have Rs10 million (approx. Dh500,000) and invest it only in fixed income investments you will end up with Rs15 million (Dh720,958) 10 years later. For the Rs25,000 (Dh1,201) monthly lifestyle today in India, this could last you for around 20 years.
After that you will run out of money. The solution out of this dilemma is, to save a higher percentage of your income for the remaining time before retirement, retire later, reduce post-retirement spending levels, develop risk tolerance and invest in equities.
• They will need that risk tolerance for next few decades during their retirement as well, since even during the retirement phase the corpus would need to be invested in equities.
• If the person is unable to do that, he or she should develop a tolerance for a significantly less affluent lifestyle during their retirement, and, their monthly contributions would also need a significant increase.
• This is because they would need a much larger corpus during the retirement period if it were invested in only fixed income instruments.
• For developing risk tolerance, experts suggest that you develop a better understanding of equities, what the risks mean, where returns come from, how businesses create economic value, and herd behaviour among investors in markets, among other topics.
