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Working years cut short? Here's what to do.

Working in an industry where fewer working years are usual can make financial planning trickier but even more crucial. Here is a plan for Prateek, who is in a similar situation.

Working years cut short? Here's what to do.

Prateek (36) works with a BPO and takes home a little less than Rs 1 lakh every month. While his monthly expenditure amounts to about Rs 50,000, he also pays a home-loan EMI of Rs 23,000. Although Prateek's wife earns about Rs 8,000-10,000 a month by giving tuition, this income is inconsistent and unreliable.

Prateek says that the industry he is in hardly employs people over 50-55 years, which may force him to retire early. He wants to know how he should prepare for his retirement.

Working years cut short? Here's what to do.

Working years cut short? Here's what to do.

Continuing to invest in equity
A believer in equity, Prateek has done a great job by investing in equity at the young age of 21, when he started earning. Further, he has increased his contributions in line with his salary increments. Starting early helps reap the benefits of compounding and can do wonders in the case of equity over the long term. Thanks to this, Prateek has accumulated close to Rs 18 lakh in equity. At present, he invests about Rs 15,000 every month in equity funds.

Saving for his daughter's higher education
Prateek assumes that Rs 10 lakh in today's value should be sufficient for his daughter's higher education. He wants to accumulate a similar amount for her wedding. But by the time these goals fall due, these amounts would swell to Rs 20 lakh and Rs 36 lakh, respectively, at annual inflation of 6 per cent.

Earmarking about Rs 8.5 lakh from equity accumulations will help Prateek meet both the goals, provided his investments continue to earn at least 12 per cent every year. He should start redeeming systematically about two years before he is likely to need the funds for his daughter's higher education. Since it is a non-negotiable goal, any sudden fall in the market can unnerve him and derail his goal.

Having said that, he must remember that the entire amount may not be required at one go but over a few years. Therefore, he should set a systematic withdrawal plan (SWP) accordingly.

Creating the retirement corpus
Going by his current monthly expenses, Prateek would need a corpus of around Rs 3.5 crore to maintain the same lifestyle for 35 years post-retirement (assuming inflation at 6 per cent per annum and return on investment post-retirement at 8 per cent per annum).

His mandatory EPF deductions are likely to fetch him close to Rs 82 lakh at the age of 50, provided the contributions increase by at least 10 per cent every year. On the other hand, his ongoing SIP contributions in equity funds, along with the remaining accumulated balance, would fetch him another Rs 1.46 crore. So, there will be a shortfall of about Rs 1.22 crore.

Therefore, despite starting early, it may not be possible for Prateek to accumulate a sufficient corpus for a comfortable retirement by 50.

How to reduce the shortfall in the retirement corpus
Prateek can reduce the shortfall in the required retirement corpus by increasing the number of earning years. With this, he will accumulate a larger corpus while reducing the number of years for which the corpus needs to be used for generating regular income.

Check the table 'Earning years and retirement corpus'. If Prateek can work for another five years and earn just equivalent to his monthly expenses (Rs 50,000 at an inflation-adjusted level) after the age of 50, the shortfall in his retirement corpus would reduce by 65 per cent. If he works for another five years till the age of 60, he will have a surplus of Rs 1.4 crore rather than a deficit.

Working years cut short? Here's what to do.

Postponing retirement
Although Prateek may have to retire from the BPO industry at 50, he should continue working after that. He still has 14 years in hand which he should use to develop a new skill that can help him earn later. After 50, he can also consider options in other industries or explore self-employment. He can even think of changing his industry now. His wife should direct part of her income to equity to help bridge the deficit. She can also consider a higher-paying, more dependable job. Besides, the couple should prepare and follow a strict budget. Cutting down on discretionary spending and diverting the same to equity will undoubtedly help in the long term.

Do keep in mind