Saurabh Saraf, 63, is looking forward to retiring in the next two years. He takes pride in having built a sizeable corpus through disciplined investments in the PPF, EPF and equity . These choices have been made after careful research over the past 25 years. While he feels a sense of accomplishment, a lingering doubt remains—what if the corpus falls short of his needs?
Saurabh Saraf has done all the right things by starting early, saving regularly and keeping his untouched. However, the adequacy of this corpus will depend not on his past , but on future . Assuming that Saraf might live for another 30 years, his income would be similar to his first salary— good to begin with, but too small as time goes by.
It takes both math and a set of assumptions about the future to estimate the adequacy of the corpus. Many retirees make the mistake of comparing returns on safe investments with inflation to reassure themselves. For example, Saraf might assume that a government savings scheme with 8% per annum return, and inflation at 7% should be enough to meet his post-retirement needs. This math ignores the fact that the interest income is a simple rate, while inflation compounds every year.