All other life goals can be adjusted with or delayed but Retirement is one thing, which will happen!
Yes the age may differ from person to person. Each one must plan for retirement first. It is actually easy, if we follow some discipline towards achieving this goal.
How Retirement Ready Are You?
According to the Aegon’s Retirement Readiness Index, India ranks first with a score of 7.3 out of 10, ahead of the BRIC-Brazil and China counterparts. However, if you analyze the data further, you will realize that Indians use Bank Fixed Deposits and Life Insurance as their primary retirement planning tools.
This is contrary to the products primarily used by the rest of the world, i.e. mutual funds, annuity, offshore funds, etc. 83% of Indians believe that retirement readiness should be a shared responsibility between the individual, employer and the Government.
Thus, a stronger drive and thrust towards retirement planning is of utmost importance.
Beginner’s Guide To Saving For Retirement
Things you should do to reap the benefits of all the hard work you have done and enjoy a relaxed retired life have been highlighted below:
1. Start Early
As they say, ‘It is never too early to plan for your retirement’. The earlier you start saving, the easier it would be for you to achieve your goals.
Start with small amounts at an early age. It helps to build up a higher corpus due to the ‘compounding effect’ of investment.
We can clearly see the difference in corpus when Raj and Seema started saving Rs 5000 each but Seema started 10 years later and thus had less than 1/3rd the corpus that Raj could make with the same investment.
Some things that you can keep in mind while doing so are:
- Retirement is not a destination. It is a journey. Hence the retirement corpus needs to grow even when you start withdrawing from the same, in order to combat inflation.
- Do not withdraw the amounts that are kept aside for retirement, not even to buy a house. For e.g. Employee Provident Fund (EPF) is a part of corpus to be built for retirement and should not be withdrawn when you change a job.
2. Consider Value of Money and Inflation
When planning for retirement one needs to consider the fall in value of money due to inflation. In simple words, a dozen of bananas that costs Rs. 20/- ten years ago, now cost Rs. 60/-.Thus, the value of Rs. 20/- has reduced over the time, due to inflation.
Thus, while computing the amount of money that you require at the time of retirement, you need to consider inflation and then back calculate the amount that you need to invest today.
Also, with increased life expectancy, any miscalculation of inflation would discomfort your retired life.
Let’s take an example of a 30-year-old who expects to retire at 60. His life expectancy is approximately 80 years and his monthly expenses now is Rs 40,000. With no rise in lifestyle, which is an unnatural expectation, and an inflation of 6% p.a. for a period of 30 years:
This means, your monthly expenses would become Rs 7.36 lakhs per month by the time you are 80 years old. And all of this assuming the lifestyle remains constant! This is BIG MONEY! Have you thought about it?
3. Proper Asset Allocation
A basket of investment options are available in the market and you need to choose the right one at the right time. Thus, if you start investing at an early age, you can choose investing in equity linked mutual funds, which would provide higher returns than bank FDs and definitely are more tax efficient.
Ideally, retirement planning basket should be a mix of EPF, PPF and Mutual Funds. You need to consider your overall asset allocation and maintain your equity allocation over all the years, in order to beat inflation.
One thing that is to be considered while choosing any asset class is that the real return on the investment has to be positive.
That is, if the interest earned on a fixed deposit is 8%, while the inflation stands at 10%, the real return on investment is negative as inflation eats up the interest income earned on deposit.
Each person has his perfect Asset-allocation mix which depends on his age and risk appetite. Thus, if you know your ideal Asset Allocation Mix, you should try to achieve that at all points of time.
Typically, a 30 year old would have a higher risk appetite than a 60 year old because of age being on his side. However, it also depends on your current liabilities, family wealth, dependents, etc.
Maintaining the minimum requirement percentage in equity is one of the easiest ways to build a sound retirement corpus!
4. Provide for Medical Insurance
Typically, household expenses are expected to reduce post retirement with no more EMIs to pay or no more expense towards children’s education. However, the major expense post retirement is towards medical expenses.
A major illness may toss away your entire financial planning. It is therefore very crucial to have a health insurance policy.
Most of the times people depend on the health coverage provided by the employer only. Many insurers provide for continuation of the same health plan provided by the employer. But insurers of the employer may change and also their clauses.
It is, therefore, advisable to have an individual policy in place which is operational post retirement.
Since health plans are lifetime renewable, you must continue the same till the last day.
5. Think of Alternate Source of Income & Develop a Skill Set
In today’s world ‘change’ is permanent and inevitable. Any change in technology, policy or a global turmoil may result in losing a job or closing down of business.
Also, with increased stress levels, people want to retire early. It therefore becomes important to develop a skill, which can generate income in case you need to give up your job early.
6. Make a Will
If you have yet not made a will, make it now. While we save for our loved ones, it’s important that they don’t face any difficulties in our absence.
It is not only important to abridge our spouse or children about our investments, it is also important to make a ‘will’, which would legalize their rights.
At the end of all the retirement planning, you would be assured of a comfortable life post retirement. Post retirement life should be stress free and the only way to make it happen is to build a healthy corpus and stay fit!