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Retirement funds, also known as pension funds, are investment options that allow an individual to save a certain portion of their income for their retirement. These funds offer a regular source of finance after one retires; a retiree receives annuity on their investment until their demise.
An individual has to consider several aspects, including their possible age of retirement, life expectancy, inflation, rate of return, etc. while calculating a retirement fund. For example, someone in their 30’s will have 30 years to save or invest to prepare for their retirement. If their annual expense is Rs. 7,20,000, then they will require a corpus of Rs. 54,80,824 (with 7.00% inflation year-on-year) to maintain financial stability after retirement.
This is the most crucial factor to consider. Inflation reduces the value of money with time and what may seem adequate today may prove to be insufficient tomorrow. For example, let’s assume your monthly expenses are INR 1 lakh today and you have 10 years remaining for retirement. Even a modest inflation of 5% will push this amount to a whooping INR 1.6 lakh.
This is another vital consideration. Often after retirement, people want to leave behind an inheritance for their legal heirs. If you intend to do that then you might need a bigger corpus.
Medical costs form a significant portion of a retiree’s expenses. Therefore, it’s vital to make enough provisions in your corpus to take care of these costs. While a medical contingency can wipe out your savings in no time, the level of difficulty compounds in your retired life as there’s a break in active income.
