Retiring Wealthy is the most desired end-result of Retirement Planning. Thanks to advances in modern science, the average life expectancy is continuously increasing. Changing trends show that the non-working life of an individual can be longer than his working life. While social security systems in developed countries have evolved, the one in our country is virtually non-existent. Joint families, which inherently provided such security, are increasingly being replaced by ‘nuclear families’ at top speed. With increasingly stressful life everyone wants to retire early but this requires right planning. For anybody who needs Rs 30,000 per month to run his household today would require Rs. 1.63 lacs per month 25 years later to maintain the same life-style, if inflation is assumed at a very modest 7% per year. This comes to a requirement of Rs.19.54 lakhs per annum at that time. Now if one assumes to earn 8% returns post retirement for retired life of 30 years, he needs Rs.5.66 crores at the time of retirement, if no other income or expenses are considered except just meeting his monthly household expenditure to maintain the current life-style.
|Monthly Expense||Rate of Inflation;||No of yrs for retirement||Future Value|
|Rs. 30000/-||7%||25||Rs. 1.63 lacs|
You need to plan for retirement because:
- Traditional avenues of savings are not sufficient to meet retirement expenses.
- Rising cost of living.
- With higher life expectancy, you need to provide for around 30 years of your retired life.
- Not all of us are covered under pension schemes. However, even for those likely to get a pension, with the Basic of pension fixed (DA may or may not increase), the pension’s real value will be about 50% approximately 8 years after retirement. 12-13 years later, the same pension may not meet even 1/3rd of your house-hold expenses.
- No social security system in India like in the USA.
Thus, retirement planning is compulsory for each of us if we want our post-retirement life to be as great as pre-retirement life.
How do you plan for your Retirement? Remember – the best time to plant a tree was 30 years back; the next best time is NOW! Depends a great deal on what is your life-stage now. Follow the links below to reach the section relevant to you:
- Planning in Early Years of Service (22-35 Years of Age)
- Planning in Later Years of Service (36-50 Years of Age)
- Planning When You Are Just About Retiring or Already Retired
Planning in Early Years of Service (22-35 Years of Age)
A question uppermost in the minds of individuals is when should they start planning for retirement? The answer to this is simple – start planning now if you haven’t started already. Over here, we have outlined when and how one should start planning for retirement.
When do I want to retire?
An individual wishing to plan for his retirement should first know when he wants to retire. This will help him assess the number of years he has left to save for retirement and also allows for a more systematic and disciplined approach towards his planning. In case it is not very clear right now, It is alright – additional planning will always stand you in good stead.
Target savings for retirement
This is the most important factor that one needs to consider in his retirement plan. A person should first assess how much he would need post-retirement. This decision is very important and is dependent on several factors like whether he wants to start a small business after retirement, his dependants (wife/parents) and their expenses, child’s marriage or education, inflation, etc.
Start planning early
Never postpone planning for your retirement, start at the earliest. The earlier one starts saving for retirement, the higher is his return on investment. The power of compounding works even more wonderfully if you start early and a few years’ delay could make a lot of difference to your savings. If you are contemplating a life insurance policy, Term Insurance is the way to go and a head start works out far cheaper. Taking an insurance policy at an age of 25 years will be cheaper than taking it at the age of 30 years.
Planning in Later Years of Service (36-50 Years of Age)
Late but There is Time to make Up
The very first thought that would come to the mind on reading the tagline is – What Late? I still do not see the so-called retirement anywhere on the horizon. The straight answer to that is – Do you remember how the time has flown off since you started your career? It is a human tendency that past looks so near, so compressed (past 10 years look so-o-o yesterday) while the future looks so stretched ( 10 years later? – oh! So far away). Before you know, future will be today! So plan, before it is too late.
What do you Plan?
Planning involves working a comprehensive strategy so that your retired years are Golden years and NOT Sunset Years. What makes it difficult in your case are today’s responsibilities and those that are waiting just round the corner. In fact, that is what makes it easier – put in droplets of money today. Then watch in amazement – The Power of Compounding will ensure that you get a full pond to bathe in, when you need it. Small amounts like even a 5000 rupees per month become a credible sum when allowed to grow at a decent, non-risky but regular and disciplined pace. You also do not have to unduly compromise your today’s lifestyle to reach a comfortable level during and after your retirement.
Planning When You Are Just About Retiring or Already Retired
Retirement is like a long vacation in Las Vegas. The goal is to enjoy it the fullest, but not so fully that you run out of money.
-Jonathan Clements, journalist and author
In retirement, we dream, we will do the things that the daily whirl does not allow us to—read, socialise, travel, play golf, club, swim…. The list is long. The reality is, in India, most people in retirement barely manage to maintain their lifestyles. Some run drastically low or completely out of cash, lose their financial independence, and lean on their children for their livelihood. A big reason why retirement dreams often turn into nightmares is the lack of or insufficient funds to draw on. After all, there has to be enough to create an income stream that can replace the monthly paycheque for two decades or more. Today, the average urban Indian lives for around 80-85 years, while he still retires around 58. However, the good news is that many Indians have woken up to this financial reality now.
While cracking their retirement nest egg, people need to strike a fine balance between safety and liquidity. To meet their monthly requirements, they need to invest in schemes that have the ability to deliver regular income either by way of dividend or interest from the time when they need it. Once this is done, the balance needs to be invested in other debt and equity options.
Common retirement mistakes. Most Indians with a large retirement corpus tend to look only at fixed-income options such as fixed deposits to “secure” both principal and returns. That plan is faulty. Inflation nibbles away at purchasing power, till, in future, income from these deposits cannot meet your cash needs. They need not do so because now there are options that provide better returns and also provide liquidity.Indians lay a lot of emphasis on safety of their investments. In the process, the yield is sacrificed which leads to a lot of pain later when the actual effect of this safe but very low-return avenues is realised.
One should, by all means, think about safety but that doesn’t mean that a 60-year-old, who has a huge corpus, cannot invest in equity. He can always invest a small portion in equity. The mistake people make is to totally shun equity. People also often don’t reinvest the savings they make from the monthly returns, after meeting their monthly expenses. It is possible to make that money work for you as well.
How to use your retirement money. You can begin by investing about 20-25 per cent of the retirement corpus in a liquid fund, open-ended debt mutual fund or a fixed maturity plan offered by mutual funds. In case you want to park your money in a bank, opt for short-term fixed deposits instead of a savings bank account. However, taxation is a very big issue here since big money is involved. If you are not careful, as much as 30% of your returns may get taken away as tax. Another option is to invest in an equity mutual fund scheme to the extent that you are comfortable with equities in your portfolio. This will provide you with liquidity as and when you require it. While investing in equity mutual funds, consider factors such as track record of the fund, ownership structure and size. Bigger funds usually perform better than smaller ones, as they get more flexibility of investments with their larger corpus. Don’t get bothered by the daily market fluctuations. We believe that the Indian economy will continue to do well and downturns will be temporary. This is also the reason we advocate exposing only a small portion of your portfolio to equity.
Reverse mortgage. You can now pledge your house for reverse mortgage at a later stage in your life to enhance retirement income. It is a very good option for retired people (age 60 years and above). It is a very well developed product in the West, but in India, the market for the product is not yet developed. However, the legal framework is in place and there are a large number of banks which provide this facility now. It is hassle-free, ensures that your house remains with you till any of you two (you and/or your spouse) are alive and still gives you the flexibility of the house passing on to your heirs if they want it, subject to some conditions and payments
Inflation. Inflation gradually chips away the purchasing power of your retirement corpus. The only way to hedge against inflation is to invest a certain portion of your portfolio in equity. When you invest in equity, don’t do it directly. Do it through debt and equity mutual funds. Other than equity, there is no financial product available in the Indian market, which can hedge against inflation directly. Nobody is planning to introduce inflation-indexed bonds or similar instruments in the country yet. Markets for such products are not developed in India. And even if they do develop in future, the cost of hedging is likely to be expensive.
So What do you do Now that you are retired or just about to? As amply brought about above, you need to be smart – create enough cash flows to keep your lifestyle while still making sure that you park your money wisely so that Inflation does not eat away the gains made. We have exactly such a planning for you which will be customised for you, since everyone is different with peculiar needs. In our planning, we will suggest to you:
- How should you plan your finances now so that it adds on to your pension, maintains your lifestyle to what you have been accustomed to prior to retirement, while also meeting whatever mandatory obligations you have on you?
- What should you do with the bulk money that you have got or will be getting post-retirement?
- If you have missed out on planning for your own house or have children dependent on you or any other requirement, how should you plan you plan your finances?
- So, the planning will be done specific to you and exactly meeting your needs.
Contact us by clicking here. You will forever be grateful that you did so – And no, it will not cost you the earth!!
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