“Say goodbye to the tension and hello to your pension”
Very rightly said by an Author, after decades of working and saving, everyone wants to retire. But now is not the time to coast. If you do plan to retire, consider taking some crucial steps today to help ensure that you have what you need to enjoy a comfortable retirement lifestyle.
Retirement means the end of earning period for many unless one chooses to work as a consultant. Once you retire, you will no longer receive a salary/ earn regular income. And to sustain your daily expenses and live your golden years you will need a financial back-up. To remain independent, you need to save and invest for your future now. Mere savings in the bank will not be enough. Mainly because of the inflation bug. Inflation is the rise in price of goods and services. And hence the value of your money declines because of inflation.
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Before working on a retirement plan, one should understand the objective of retirement planning. You need a plan that:
- Gives you income that matches or overrides inflation
- Allows you to maintain your standard of living
- Keeps you from being dependant on children or family
- Offers periodic pay-outs, to manage daily expenses
What are the key steps in retirement planning?
- Decide the retirement age
It is usually 60. That is the age most associated with retirement.
When it comes down to it, there is no mandatory retirement age. Just like there is no one-size-fits-all career, there is no one standard retirement age or income. It all depends on factors such as the desire of the person to keep working (or not). Or the post-career lifestyle they want to have and their health. Or if they have any kids at home, if they plan to stay in the same house or downsize, and so on.
In any case do not use 60 as a benchmark; you are ready to retire when you can live comfortably on the income provided by your total retirement savings.
Estimating your retirement age is an important step, because:
- After this age, your regular income stream will stop or at least reduce considerably (in case you are eligible for pension). You will have to depend on your savings and investments to take care of your retirement needs.
- This is also the timeframe you are left with to plan for retirement. For instance, if you are 25 years old and you wish to retire at the age of 50 years, then years to retirement = 50-25=25years.
- Start early to retire peacefully
Waiting until later to start improving your money situation might mean saving more or working longer, which is still doable. But while the right retirement age can vary, the time to prepare for it is always the same: right now.
Here is an example of what a big difference starting young can make. Consider two scenarios:
- Start investing at the age of 25 – Invest 5000 every year for 10 years till the age of 35 and then stop investing. Redeem the corpus at the age of 65.
- Those who start investing at the age of 35 – Invest 5000 every year for 30 years till the age of 65.
| Start investing at 25 | Start investing at 35 | |
| Investment amount | Rs. 50,000(Rs. 5000 every year every year for 10 years till the age of 35) | Rs. 1,50,000(Rs. 5000 starting at 35 till age of 65) |
| Corpus at the age of 65 | 7,28,865 | 5,66,416 |
Rate of return assumed at 8% in both scenarios
That is a huge difference! This is the power of compounding.
It is important to recognise that being young provides you a benefit that is not available to all, ‘time’. As it is said, “the early bird gets a bigger pie”.
Beginning to invest early in life will enable you to accumulate the necessary corpus required on without much stress. And it gives you a peace of mind. And if you are in your 30s and haven’t even started planning for retirement, then it is still not very late. You still have many years to work, earn and save for your golden years. But make sure you do it prudently and differentiate between your needs and wants.
- Determine your retirement corpus
Given India’s rising longevity, high inflation rate and lack of any form of social security for retirees, building an adequate retirement corpus is necessary during your working years. Yet most folks get stuck at the very first step in this exercise – estimating how much they will need for a comfortable retirement.
First, ascertain your annual expenses at present. It is important t0 make an accurate estimate of how much amount you will require, to maintain your present lifestyle after you retire.
Then factor in inflation to calculate how much your present expenses will amount to at the time of retirement. This is referred to as future value of money.
This is the amount you will need every year to meet your post-retirement expenses. Following table will give the multiple at which the post retirement expenses will be to your current expenses.
Continuing the example, if his life expectancy is 85 years then he will need a corpus that will meet his expenses for 25 years after retiring.
- Current age – 40
- Retirement age – 60
- Current annual expenditure – 10 lacs
- Annual expenditure at the retirement age of 60 accounting for inflation of 6% – 32 lakhs
- Life expectancy – 85 years
- Corpus required at the age of 60 to meet expenses till the age of 85 if approximately 7 Crores.
- The corpus is calculated assuming real rate of return of 1% on the portfolio. If the inflation is 6%, the portfolio should yield at least 7% to meet the expenses and last for 25 years.
However, the assumptions used make the estimation of one’s retirement corpus an inexact science. Having set your target, you may have to make tweaks along the way if your real-life experience varies from your assumptions. But then, working out a rough retirement target and starting on your investments as early as you can is far more critical to retiring comfortably than trying to get your target correct to the last decimal.
- Calculate the future value of your current savings
How much you can save every year, after meeting all your expenses, plays a crucial role in building your retirement corpus. Your saving is the surplus amount that is left after deducting your annual expenses from your net salary.
The ideal way is, to earmark a portion of your savings towards retirement. This part of your saving should be treated as sacred and should not be disturbed unless it is very urgent.
After estimating how much amount you will be able to save annually towards your retirement corpus, the next step is to find out its future value. To determine this, you must factor in the expected rate of return on your investment. This is the value of your savings or investments at the time of retirement.
For instance, if you are able to save Rs 200,000 annually for your retirement, and you invest this amount in an avenue, which earns you 10% rate of return p.a., then after 25 years, you will have a retirement corpus of approximately Rs 2 crores. If you start early and save the same amount annually for 35 years, then the corpus will be closer to 5.5 Crores.
- Make an ideal portfolio
Depending on your current age and the risk that you can afford to take, you should define a standard allocation to each asset class. It is important to have a diversified investment portfolio across the asset classes.
Some assets like equities can offer you a better inflation. This is adjusted return (also known as real rate of return) better than fixed income instrument can provide safety. Gold can be a store of value and act as an insurance in your portfolio. The basic principle behind age-based asset allocation is that your exposure to portfolio risk needs to reduce with age. Here, it is primarily being referred to as the proportion of equity as a portfolio component.
You can use the thumb rule, i.e., your allocation to debt funds must be equal to your age. In other words, to find your equity allocation, subtract your current age from 100. It means that as you grow older, your asset allocation needs to move from equity funds to debt funds.
Suppose your current age is 25 years. Your portfolio may be composed of 75% of equity funds and the balance (25%) among debt funds and cash. In this way, when you reach say 45 years, you can switch to equity-oriented balanced funds. These invest 65% of funds in equity and rest in debt.
Going by the thumb rule, as you approach retirement to say 60 years, you may initiate a systematic transfer plan (STP). It will move your investments gradually from equity funds to a debt fund like liquid funds. From a liquid fund, you may afterwards redeem units to meet your income needs using a systematic withdrawal plan (SWP).
- Track your portfolio and your retirement plan regularly
Your retirement plan needs to be monitored at regular intervals like at least once a year. This will make sure you are on target to meet your objectives. Any changes in the income, expenses, retirement age, etc. needs to be incorporated in the retirement plan. Also, make sure the retirement plan meets your investment objectives in the changing market scenario.
Source – PersonalFN
- Post Retirement Planning
Retirement planning continues even post retirement. It is about making the best use of the retirement corpus that has been created over the years. It is crucial to keep:
- The tax liability at bay
- provide a regular stream of income
- and not outlive the corpus till the age of life expectancy
Building a retirement portfolio with a mix of fixed income and market-linked investments remains a big challenge for many retirees. Following are some of investment options for retirement planning for a monthly Income:
- Housing and real estate: The demand for real estate and housing is constantly on the rise. Which is further enhanced by growing population of India. This means that once you invest in real estate, your investment is bound to grow in value over time. However, it is important to invest in areas that have a high demand and high prices. This option can be a good source of monthly income, if you decide to put a commercial or housing property on rent.
- Investments in mutual funds: Mutual funds let you gain from periodical dividend returns while providing value and growth to your invested amount over a tenor period.
However, investing in equity can be risky. There are various kinds of mutual funds you can choose from, like tax savings funds, which allow you to enjoy tax benefits.
- The safe and classic company FDs: Your savings can be put to excellent use by investing in the regular company fixed deposits. These offer immense growth to your money over the tenor and deliver fixed periodical interest payments. FD interest rates for senior citizens is generally higher. For example Bajaj Finance offers its retired clients an Attractive interest rate.
- Senior citizen saving scheme: The government has crafted this scheme specially for senior citizens seeking income after retirement. This scheme offers its investors attractive interest rates with the maximum limit of investing Rs.15 lakh. In this scheme, tax is deductible from the source investment. The amount invested usually matures in 5 years and can be extended to 3 more years. The interest in this case is paid out on a quarterly basis.
- Post office monthly instalments: This investment scheme pays out the investor monthly, and thus enjoys more popularity among retirees. It requires a minimum investment of Rs.1500 and a maximum of Rs.4.5 lakh. This option is taxable and may not be suitable from those in the higher income bracket.
Thus, retirement planning is doing something today that your future self will thank you for. The above pointers will help while planning your retirement. Investing is not an overnight process, and hence it is advisable to give your investments some time to grow. Patience and smart investing is the key to building a decent retirement corpus.
Read more : How does taxation work for retirement folks across different asset classes?