Retirement planning is one of the most important financial goals in life but it is often ignored by many people in India who solely depend on their children to take care of them in their twilight years. But people need to understand that children are not retirement solutions and depending on children cannot be a substitute for a retirement planning. Today life expectancy has gone up compared to what it was in earlier times. So people live longer, have a longer post-retirement period in life and as a result need more expenses to sustain in retirement. Health care expenses also have gone through the roof. Children not having enough money or not willing to take care of their parents can put the parents in a tight spot. With a sound retirement planning, you can build your own retirement corpus and enjoy a happy retired life.
Here we lay down nine steps for a sound retirement planning which will help you on the path to planning a comfortable retirement.
Estimate the target amount required: Firstly, make an estimate of your monthly expenses today. Then estimate your retirement corpus required based on expected inflation rate, number of years left for retirement, number of the expected years in retirement and the rate of return that your corpus is expected to earn after retirement. This is the amount you need to accumulate specifically for your retirement. For example, if your monthly expenses today are Rs. 25000, number of years left for retirement are 30, inflation rate is 6%, rate of return after retirement is 8%, then total retirement corpus you need to build comes to Rs. 2.15 Crore. After setting target corpus, you need to calculate contribution required every month to reach your financial goal within your desired time period.
Select investment avenues carefully: Asset allocation is the key in retirement planning. You need to choose your investment avenues and instruments carefully. A retirement portfolio should have a mix of both equity and debt. When you begin to invest, in the initial years your portfolio should be more equity-heavy as equity has the power of compounding that helps build an adequate retirement corpus in the long run. When you approach your retirement age, you should gradually cut down your exposure to equity and increase the exposure to debt since you would have lower risk tolerance when you get closer to retirement. You should also note that there are many complex products available in the market under the garb of retirement planning, especially from the insurance industry but most of them are not transparent and have high cost structures. If you do not understand them fully and are not entirely convinced about them, it is better you avoid them completely.
Start investing early: Many people do not think about retirement planning at an early stage in life, but become anxious when they are nearing retirement. Starting to invest for your retirement from an early age brings a lot of benefits. If you start early, you have longer period to save for retirement. This will reduce your monthly contributions to your retirement fund you need to make. Ideally, you should start saving for retirement as soon as you start to earn, even if it is a small amount invested monthly. If you begin early to put money in investments like equity mutual funds, you will have longer investment horizon, therefore will benefit more due to power of compounding and your risk in equities will also get reduced to a great extent.
Maintain financial discipline: You need to be disciplined with your retirement planning. You should define all your needs and expenses and assess them against your income. Try to cut down on the trivial expenses. It is advisable for you to stick to a strict budget to make sure you have enough money to invest each month. You should strive to invest regularly and consistently which will enable you to build an adequate retirement fund over a period of time. It is very crucial not to compromise on your retirement goals. Remember not to dip into your retirement savings to fulfill your present needs.
Consider the inflation effect: Inflation is a silent killer. It reduces the purchasing power of money and eats away the earnings generated on investments. While planning for long-term goals such as retirement you should always take into account inflationary impact on your savings. It is better to err on the side of caution when you take estimated inflation rate for calculations. Also note that expenses such as health care costs are going up much faster than other costs and this usually forms a large component of the retirement expenses. While on an average, general inflation is rising around 6-7% annually, your medical bills are going up at a much higher rate of around 14-15% every year. Under-estimating the effect of inflation on expenses can prove troublesome in your retired life due to not having enough amount to fund your expenses.
Take health insurance at a young age in life: You should not neglect taking health insurance early in life. Health care inflation is skyrocketing in India. While health insurance is necessary for all, it is even more crucial for senior citizens, because health risks increase considerably with advancing age. If you do not have health insurance, you will have to fund your medical expenses out of your savings. A single serious illness can cause financial trouble for you at a time when you least expect it. You should buy a personal health insurance policy early in life when you are young and free from medical complications. The advantage is that you will have no risk of being refused a policy at an older age or buying a policy with lots of exclusions.
Increase your investment as the income grows: As you go up the ladder in your career, your income rises and your savings also go up. So, your investments for retirement goal should also increase in the same proportion. Keep in mind that your requirement of funds will increase over the years due to inflation. Increasing the monthly commitment every year, will ensure that you keep pace with inflation and reach your retirement goal faster. For example, you may have targeted to save Rs. 5 Crore for your retirement in 30 years, but increasing the investment amount may help you achieve it in just 25 years. If you get an additional surplus fund such as bonus from your employer, you can allocate some of it to your retirement investment.
Review your retirement plan: It is not prudent to make a retirement plan and let it remain unattended. You need to monitor and regularly review your plan and analyze your portfolio. Reviewing your calculations periodically will ensure that you stay on track to meet your retirement goals. You should regularly track the performance of your investments across asset classes in order to assess the impact of the changing market dynamics on your portfolio. You need to weed out bad investments which are not fruitful. In order to maintain the required asset allocation between different asset classes you may need to re-balance your portfolio periodically. Your asset allocation will need to be adjusted in response to life changes or change in market dynamics.
Withdraw smaller amount initially and gradually increase: In order to make sure that you are not short of money in your old age, you should also maintain a withdrawal plan. The financial planning rule says that you should withdraw less than 5% in the initial five years of retirement, you can gradually increase it thereafter. The reason is the longer the money remains untouched, the more it can potentially compound. Therefore, it is always better to postpone or reduce drawing from your retirement corpus, if possible. This will ensure that you do not outlive your retirement savings.
The importance of retirement planning cannot be underestimated. It is a very important part of financial planning for everyone. By planning for your retirement goal at an early age and by following above-mentioned steps you can ensure to have a happy and comfortable retirement.
Author ,Abhinav Angirish, is managing director of investonline.in, a mutual fund distribution entity. Article Courtesy : MoneyControl.com