So what's your scary number? Or, to put it another way, how much are you going to need to save for your retirement?
Why you need to know
The scary number is important. How else are you going to know what to aim for?
You won't be working when you retire, but you'll still need an income to live off. Leaving aside any money you'll get from the Employee Pension Scheme, that income is going to come from capital you've managed to save over the years.
And it's not just about how much money you'd like each year. You also need to consider how long you're going to need it for – how many years you'll have in retirement.
These days, people are living longer. It's quite possible that you'll be retired for 20 years or more. That's a long time, so working out how much you'll need is important if you want to make sure you'll have enough money in the future.
Think you're on track?
Perhaps you already have a vague idea of how much you'll have when you retire. For instance, if you have a defined benefit pension, you could be expecting to receive two-thirds of your final salary. And you may well have other savings and pensions too.
This is all good stuff, but you shouldn't be complacent. Make sure you understand how much income these savings will generate in your retirement – talk it over with a financial adviser. There may be a gap between the income you'd like to have when you retire and the one that you're on course to get from your current pension arrangements and savings.
It's this income gap that you need to save for.
Working out the numbers
To work out your retirement findings, Six-Steps uses something financial experts
call the rule of 20 . Your scary number is 20 times the annual retirement
income that you'd like.
So, say you wanted to have an annual retirement income of Rs.240,000. Your scary
number would be Rs.240,000 x 20 = Rs.48,00,000.
The calculation assumes that you'll draw an income equal to 5% of your capital
for each year that you're retired. (In this example, that would be the Rs.240,000
a year.) A 5% return could be obtained from reasonably low risk investments.
Some commentators favour an even more conservative approach, and suggest that
you should take an income based on a rate of return of 4% to reduce the risk
that your capital will run out in your late eighties. (In our example, that
would mean an annual retirement income of Rs.192,000 from Rs.48,00,000
capital.) This is something you should discuss with your financial adviser.
Take care with investment returns and inflation
Many advertisements promote higher investment returns, say, 12% and higher. Beware of
these headline numbers, they can ignore costs, tax and inflation.
To keep things consistent and easy to understand, the retirement findings
don't take inflation (and many other things) into account when calculating
the scary number. Factoring inflation into your plans, along with your debts,
savings and pensions, is something you should discuss with a financial adviser.
How will I ever save up that much?
There's no getting away from it, the numbers are scary and
depressing. But we all need to face up to them, so don't
panic.
Remember the three foundations of retirement planning and
make sure you have them covered:
- The Employee Pension Scheme (Not applicable if you are one among people in unorganised sector)
- Your home – invest in property and pay off your mortgage as soon as you can
- Other long-term savings and investments – save into tax-efficient vehicles such as pensions whenever you can afford it
- Your income can rise due to inflation and promotion which will enable you to save more
- When you retire, you may choose to downsize or sell your house and raise capital to generate an income
- For many households, any other income will improve their financial situation.
And now for the last point – nobody else will sort this
out for you so get ready to take responsibility and to take
action. Read the six steps, fill in the retirement planner
(and keep the information up to date) and visit a financial
adviser to talk about your options.
This is the money you have coming in, such as your salary or the interest that you're getting from your investments.
See more terms from the glossary
Employee Pension Scheme
A pension provided by the Employees' Provident Fund Organisation for its members.
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Capital
Your capital is how much wealth you have in assets such as savings and property. You can use your capital to generate income.
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Defined benefit pension
A type of occupational pension. Your pension will be calculated according to your final salary. With defined benefit pensions, the risk rests with the employer, not with you – one of the reasons why they're becoming increasingly hard to find. Also known as a final salary pension.
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Income gap
This is the difference between the annual income you'd like to have when you retire and what you're actually on course for from the Employee Pension Scheme and current savings
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Rate of return
Expressed as a percentage, the rate of return states the rate at which your investments grow.
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Return
This refers to or measures how well your investments perform. For instance, if your shares have made you a lot of money, it's an excellent return on your investment.
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Inflation
The rate of inflation refers to the rate at which prices rise. If the annual inflation rate is 5%, then a Rs.100 ring will cost Rs.105 next year. Inflation can eat into the purchasing power of your savings.
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Rule of 20
The rule of 20 is used to calculate your scary number. It takes 20 as a rule of thumb for how many years you'll have in retirement. Therefore, your scary number is 20 x how much income you'd like each year when you retire.
