by
Pradip Chakrabarty
Founder – Advisorkhoj.com
The concept of retirement amongst us entrepreneurs is very different from those who are in jobs. With more and more people becoming entrepreneurs, the concept of retirement is fast changing. Gone are the days when everybody worked till the age of 58-60, got a decent pension/provident fund/gratuity and lived rest of their lives on this income by saving it in fixed deposits and post-office schemes. That was possible because of assured returns and lower inflation. With increasing Inflation and changing times, the pattern of investments has also changed. The markets have moved from SAVINGS to INVESTING.
Now, what is the difference between SAVINGS and INVESTING? Savings give you an Assured Return (example – fixed deposits) on your investments while INVESTING gives you an opportunity to explore the benefits of Equity Investing (by taking the route of Mutual Funds and Direct Investment in stock market). While Savi
The best way to understand the difference is us the entrepreneurs! We entrepreneurs do not want a conventional job or even if we had one, we have left it. We only have an idea and maybe a little money! We end up investing that money into our own idea with the hope that it will click someday and make us crorepatis! Investing in the stock market is like that, only there you are investing in some known companies such as the Reliances, Tatas or SBIs of the world. In both the cases you are taking some risk! If the share price of these companies falls, your total investment goes down and/if your idea fails or takes more time to capitalize, then you lose some money while waiting period increases! But, remember since you have taken the risk the rewards could also be higher!
Moreover, since you are an entrepreneur you are already a risk-taker! Investing in stocks and entrepreneurship is similar. Both are long-term investments that come with a caveat – “More people fail not because they lack knowledge or talent but because they quit. The secret of success lies in two words, persistence andresistance. Persist in what must be done and resist what ought not to be done.” Lesson – Stay invested in Equities for a long term and be persistent with your idea, and do not quit as you are your own equity!
Still, I will throw some examples here to convince you about Equity Investing –
- BSE Sensex has historically given 20% + annualised return. However, there are some interesting points to note – Post the 2008 crash of about 50%, one can see how the markets have performed differently in each year. In 2009, the markets gave positive returns of about 81%, in 2010 the returns were just 17% and in 2011 the returns were down 24%. The interesting point here is that the average returns are about 20%, even after the 2008 crash and 2009 boom. The lesson is pretty much clear – long-term investment pays and one need not bother too much about the ups and downs of the stock market.
- An investment of Rs. 5000/- per month in a MUTUAL FIND SIP (Systematic Investment planning) can fetch you Rs. 1.17 Crore after 20 Years (Remember, here your total investment is only 12.00 Lacs – Rs. 5000 per month multiplied by 20 years) – presuming you an entrepreneur aged about 30 and plan to retire at age 50!
Now, lets’ discuss how much money the entrepreneur needs to retire (presuming the idea has been capitalized, you do not want to work or have sold off your business to some PE at a fabulous valuation or maybe you have come up with another, better idea!)
- First, find out why and how much money you need after retirement in the current value – This requires an analysis on how the requirement changes after retirement. Remember, you will be married, have children and buy some property and therefore your expenses for children education, their marriage, home loan EMIs etc. will be round the corner or over by the time you retire. Assume that children are settled and staying separately. You have to provide for a driver, house maid and extra medical cost during this stage. An above average urban family of 2 (husband and wife only) requires around Rs. 30000/- per month in the current situation if they have their own house to stay. Depending on the life style, you are maintaining now, it can be lower or higher.
- Now let us see how to calculate the retirement requirements (Assumptions: your current age is 30, you want to retire at age 50 and your Life expectancy 75 years. Post retirement Investment Return @ 8% (mainly in fixed deposits/ Debt investments/ Postal Deposits as at age 50 you might not like to take the risk of equity investing).
- Now, let’s do the need analysis with real figures:-
| KEY POINTS IN NEED ANAYLSIS | |
| a. Entrepreneur’s Current Age | 30 |
| b. Retirement age | 50 |
| c. No. of years left for retirement (b-a) | 20 |
| d. Life expectancy | 75 |
| e. Years after retirement (d-b) | 25 |
| Current Annual Expenses (Monthly 30,000) | 360,000 |
| Expected growth in expenses (Inflation) | 6% |
| Annual expense at retirement age (Monthly 96,214) | 1,154,569 |
| Rate of return on accumulation of retirement corpus | 10.00% |
| Rate of return on retirement corpus | 8.00% |
| Inflation rate | 6% |
| Inflation adjusted rate of return | 1.89% |
| Savings Corpus as on date | 1,000,000.00 |
| Retirement Corpus | 23,274,653 |
Therefore, you will require a corpus of more than 2.00 Crores (exactly Rs.23, 274,653!) at age 50 to retire and live life till age 75. Sounds like big money? Don’t get alarmed by seeing the huge amount. By adopting disciplined and systematic investing this corpus is easily achievable.
But how, that I will cover in the next issue! I will also cover what happens to the entrepreneurs’ family if something untoward happens to the entrepreneur himself in between and the family needs protection and continuance of the same lifestyle. I would also like to share an excel file through which each one of our mentees/entrepreneurs would be able to calculate/draw their respective Retirement Plans.
To be continued!
This article was also published in "Chatterpiller", the newsletter of Carma Connect
https://carmaconnect.in/newsletters/2012/07/13/food-for-thought/
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