Question

Assume you plan on retiring in 30 years (i.e., in the year 2049). Share your estimate of your future financial need, in terms of annual earnings. Share your desired quality of life and living standards. Finally, define both your role and the government’s role, in meeting your future financial requirements.

Answer 1

Solution:-

A reasonable way to financially plan for retirement is to decide the desirable living standards after retirement and compute the annual earnings required in today's value to maintain those standards, and then finally adjust it for future inflation to arrive at the actual annual earnings desired after retirement.

Once a person computes the amount of annual earnings required after retirement, he can plan the investments and savings he needs to make in order to achieve that post-retirement income.

Every person wants to build a house for himself during their working career itself, so there will be no rental or mortgage expense after retirement. Other than that, the desired quality of life after retirement and their value in today's monetary terms are as follows:

Expense (desired living standards in brackets)	$
House maintenance expenses (To keep the property neat, clean and updated)	12,000
Food and groceries (To eat healthy, fresh and premium ingredients)	36,000
Cook and maid salary (To avail good quality help services for old age)	24,000
Traveling, tourism and entertainment (To travel twice a year, dine outside once a week, etc)	40,000
Personal expenses (Books, periodicals, etc)	12,000
Health and medical (Good quality medical care, medicines, etc)	10,000
Health, car, life and house insurance (To insure any uncertainty)	25,000
Other miscellaneous expenses (Various other expenses)	21,000
Total expenses per annum	180,000

Let's say that the tax rate for senior citizens is 20%, the annual income required to meet above expenses would be $225,000 (i.e. 180,000*100/80)

So, in today's monetary value $225,000 per annum is required to maintain the desired post-retirement lifestyle. If we estimate the inflation to average 0.5% per annum in the next 30 years, it means that we would require $261,315 [calculated as $225,000*(1+0.5%)³⁰] in terms of monetary value of 2049 to maintain the desired living standards.

Our role in meeting financial targets:

In order to meet the financial resources required to generate enough income necessary for meeting desired living standards, we must invest with discipline, planning and risk-awareness. Our investments chosen must be the ones which can generate the required returns necessary for the targeted capital accumulation, as well as keeping risks down to low levels. We must ensure that we make expenses as per the disposable income left after making the required level of investments and never break that discipline.

Government's role in meeting financial targets:

• The government must ensure that the inflation remains as low as possible so that our retirement investments have the desired value at the time of retirement.
• The economy must be well managed so that the investments generate good levels of returns necessary to meet our targets
• The tax rates for senior citizens must be reasonable and predictable without much volatility in policy making
• Any part of the retirement portfolio that is invested in government sponsored retirement funds such as provident funds, pension funds, etc must be managed with care and responsibility by the government, it should be kept safe and must generate market competitive returns