Retirement planning is a multi step process that evolves with time. Building the financial cushion that will cover everything is necessary for a happy secure & enjoyable retirement. The fun part is why it makes sense to pay attention to the serious—and perhaps boring—part: planning how you’ll get there.
A. Start Early – Most people start planning for retirement when they are about to retire or are already retired. The disadvantage of starting late is that you don’t have the time to grow your capital. That is why it is important to plan for retirement early when you have just started earning and can invest. Compound interest is one of the major benefits of starting to save early. When a compound rate is in effect, interest is paid on both the principal and the total amount of interest already paid. Your capital investment will help you generate more returns if you begin investing in your late 20s or early 30s and do so consistently. As a result, the challenge of creating a sizable nest fund for your retirement period becomes considerably simpler.
For Example – Consider a person who starts investing Rs. 5,000 per month at the age of 20 and continues till he retires at 60. Assuming the growth rate at 15% p.a., his investments would grow to Rs. 15.5 Cr.
Similarly, if a person starts investing the same amount from his age of 25, considering all other parameters same, his investments will grow to Rs. 7.3 Crores. So the difference of mere 5 years will result in less savings. Therefore it is important to start as early as possible. Never forget that starting to save is never too early or too late.
B. Plan for a longer life –
People are likely to live longer than they have assumed. More than 1 in 10 women and 1 in 5 men are projected to make it to 100 or older if they self-report non-smoking and excellent health. And with the new medical advances, there are higher chances that one may live longer. Therefore, you should budget for 30 or more years of living expenditures in your retirement plan. To stay up with inflation and lower the chance of outliving your money, your investments must continue to increase even after you stop working.
C. Start saving & Keep Investing –
Keep up your savings efforts, whether they are for retirement or another objective. You are aware that saving is a profitable habit. It’s time to start saving if you haven’t already. If necessary, begin modestly and work to raise the amount you set aside each month. Your money has more time to grow the earlier you start saving. Make retirement planning a top priority. Make a plan, follow it, and establish goals. Cut Down On Unnecessary Expenses.
Inflation plays a major role in eating up your hard-earned savings. So, you should be investing in various asset classes and not just one. This gives you the benefit of diversification and overall the portfolio mix will help you in beating inflation.
D. Asset Allocation –
Determine the number of years you are away from retirement and accordingly construct your portfolio. If there are more than 20 years to accumulate, you can go for aggressive asset allocation. Equity weightage should be higher, say 75% or more. As the retirement year comes near, you can re-balance your portfolio as and when required. At retirement majority of your portfolio should be in debt as there are less fluctuations compared to equity. Even after retirement there should be some part of the equity because the retirement period is long so the funds required for expenses at 80s can grow at the equity growth rate and you can get better capital appreciation
E. Know your retirement needs –Starting a family is a major life ambition for many individuals, but raising children can severely deplete your savings. The family you want to have will therefore affect how you plan for retirement. Your current household expenditures would also include your children’s expenses. You may or may not consider this expense in your retirement corpus calculation because in your retirement your children will be financially independent and the only dependent person on your corpus would be you. Many people dream of travelling during retirement. it can be an exciting adventure, but extensive travel will eat away your retirement savings. But with proper planning and execution, you can enjoy travelling freely even in retirement.
F. Understand Healthcare Costs – During retirement, medical costs frequently increase significantly as we get older and need more care which becomes expensive. Include health care costs as a part of your monthly expenditure and assume it to grow by 7% to be conservative. Also, it is important to have health insurance from early age and continued, so that during retirement you will get the benefit of lower premiums & No-Claim Bonus in certain policies.
G. Keep your Retirement Savings aside – You will lose your principal and the capital appreciation if you withdraw from your retirement funds at any time before retirement and you could also forfeit tax advantages or incur penalties for early withdrawal in case of NPS, PPF or EPF. Also it is not feasible to withdraw before time. It is important to maintain an emergency fund so that in case of unforeseen events where you need money, you can take it from the emergency fund and your retirement savings won’t be harmed. This emergency fund should at-least be 6-12 months of regular monthly expenses.
Planning for retirement is becoming more and more of a personal responsibility. It must be as much a part of our goals right from the moment we start investing as any other goal like buying a car or saving for marriage. Finding a balance between reasonable return expectations & a desirable level of living is one of the most difficult components of developing a retirement plan. With many options available when investing for retirement, it is only about making the right choice and getting started with it.Focusing on building a flexible portfolio that can be routinely modified to reflect shifting market conditions and retirement goals is the best course of action.
“Planning for retirement is not something we can put off until a later date. The time is to plan now” – Bob Reid
This article should not be construed as investment advice, please consult your Investment Adviser before making any sound investment decision.
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