Widely read:
As an investment advisor, I end up answering questions on a lot of topics, but the ones that bother me most are the questions on retirement planning, specifically on post-retirement management of income and expenses. The reason is the deep-rooted belief that the the main issue in retirement savings is that one should be invested in 100 per cent 'safe' asset classes, essentially, fixed income deposits of one kind or another.
Nothing could be farther from the truth. Even for people who have a reasonable size of savings, the main problem in retirement planning in India is to compensate for inflation. If India were a well-managed economy with a two or three per cent inflation rate, this may have been the case. However, the reality is that our savings are eaten away at a ferocious rate by the declining purchasing power of the rupee. Over the average 25-year period during which a retiree needs income, one can expect prices to rise by about eight times.
If you need ₹30,000 a month for your monthly expenses today, you will need ₹77,000 a month after ten years, and ₹1.3 lakh a month after 15, ₹2.2 lakh a month after 20. Not only will the withdrawals from your retirement kitty need to increase, the remaining capital must also increase in order to support those higher withdrawals. It's not an easy problem to solve.
However, there's one simple way to estimate the basics of your retirement expenses. In order to support an inflation-adjusted withdrawal rate, you should only withdraw whatever your savings earn over and above the inflation rate. So if your savings earn 11 per cent, and the inflation rate is 8 per cent, then you must withdraw only 3 per cent. This will allow your savings to grow at least with inflation and ensure that you will not become poorer in old age.
The above example also shows why fixed deposits and other instruments with a low rate are a really bad idea. These instruments rarely pay anything much above the consumer inflation rate. Therefore, if you stick to the above principle, you can't really withdraw anything from a bank deposit!
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