Planning for Retirement

Q. I am 40-year-old, currently my monthly expenditure is Rs 60,000 p.m. After I retire if I want to spend the same amount taking into account inflation at 6% (or whichever rate you suggest), then:

1. What will be the amount which will be equivalent to today’s Rs 60,000 p.m.
2. What amount should I invest monthly/yearly for the next 22 years, i.e. till 62 years of age so that I can build a corpus to receive the annuities mentioned which are sufficient till next 20 years (i.e. till I become 82 years of age)
3. Which mutual funds would you suggest to build the required corpus. Please give all the options, i.e. 100% bonds, 100% equity and combination of both.
4. Which annuity plan would you suggest?

- Runji, Mumbai

A. Runji, If one were to assume that inflation will continue to grow at the rate of 6% pa, then you will need about Rs 2.17 lakh to purchase the same basket of goods that you would today purchase for Rs. 60,000. That is not all, just because you have retired, inflation does not also take retirement! Since it will continue to grow, by the time you are 82, the same basket of goods would likely cost Rs 6.90 lakh. It is another matter that your lifestyle may undergo a change and your basket of goods may be different then. But consider that medical bills may go up. I would plan for the full amount and let there be a margin of safety. There are different ways of planning for the annuity or monthly cash flow. If you wish to purchase an annuity from LIC (at the then prevailing rates), you can do so. Jeevan Akshay has options of a guaranteed annuity for a 20 year period, but which is constant and does not increase with inflation. If you were to purchase an annuity today from LIC, it would cost you as given in the table below. Also given are options, if the same were to happen through a mutual fund portfolio. You need to keep in mind that in the case of this annuity form LIC, on death of the holder there is no payout to the surviving spouse. Such options are available at higher cost. If it were a mutual fund portfolio, the death of the holder results in the residual value being transferred to the spouse.