Planning for retirement is not a job for elderly people – start planning your income for retirement when young!
By Poornima Kavlekar
I have this vision of my retirement – my husband and me sitting in our sprawling backyard; me on a basket- swing, reading a book and him playing golf in our micro-mini 3-hole golf course in the compound of our picturesque chalet in Kodaikanal. This is our plan for our twilight years – a peaceful retirement in our home in Kodaikanal! All this seems far away as yet….but, to realise this dream scenario, we need to start planning our finances carefully, right away.
Planning for retirement is definitely a big concern for everyone – a concern of whether the income for retirement is enough and how to assess how much is enough. When I chatted with some retirees on what sort of planning for retirement they did earlier in life, there was a common answer: “there weren’t so many variables in our life then.”
Most of them depended on fixed deposits (interest rates were high then, say 12 to 14 %) and the interest income was sufficient to replace their salary. However today, with soaring inflation rates, a sharp rise in healthcare costs, lower interest rates and rising standards of living, many confess that their planning for retirement has proved inadequate and fallen far short of expectations in ways!
Today, many of my peers have sought professional help in estimating their expenses after retirement while some have used their own matrix to make the calculation. Of course, identifying the source for this cash flow is the next step. With the number of investment products currently on the table, retirement plan options are many. But plan and invest with care so that the payback period reaps adequate benefits. Here are a few options you can consider to help you reach your destination of a peaceful, carefree life in your golden years.
Note: This story only aims to help you set to off in the right direction. Whether you are on track will depend on your personal financial ecosystem.
The effectiveness of your entire payback period depends on how accurately you can estimate your future expenses. Yes, it’s hard to get it right 10 or 15 years in advance! In fact, many argue that you can never be accurate. Inflation is one factor that you may not be able to assess correctly when estimating a retirement corpus. That is why it is necessary to review your plans at least once a year to make necessary changes.
As a first step, get a grip over your current expenses. Go back a few months and read through your expense profile. And then try to forecast your expenses at the time of retirement. For example, if Ravi’s monthly expense at the age of 35 is Rs. 25,000 and he expects to retire at 55, assuming an inflation rate of 5 per cent, his expense at the age of 55 will be around Rs. 66,000. And based on this figure you can arrive at two things. One, the corpus needed to fund his retirement, and two, how much he needs to save from the age of 35 to be able to fund this amount.
Remember that there will be many changes in your expense profile from now to when you retire. For example, you may not have to fund your child’s education or marriage, but you may have to step up your medical expenses. Ravi will need a corpus of Rs. 1.22 crore to be able to fund his expenses post-retirement (assuming a life expectancy of 75 years). Assuming a 10 per cent return on investments up to retirement, he needs to start saving almost Rs. 17,000 per month to build this corpus. This calculation may be difficult for a layperson to make and this is where you could seek expert help.
review your plans at least once a year to make necessary changes
The power of compounding is best utilized when there is a long time frame. Maintain a discipline in channelizing a part of your investment towards this purpose. But focus on your priorities. Invest first for your children and perhaps on buying a home and if there are excess funds for investment, then you could set it aside for your retirement right away. You could start a SIP which will ensure dedicated savings or invest in a ULIP plan which will ensure annual outflow, for this purpose.
If you start early, you can afford to lock in your money for a long term so that the wealth creation stage isn’t disrupted.
There is no single product that can give you the entire targeted corpus. It has to be a mix of equity and debt-related products. But such accumulation strategies differ with age as the risk taking capabilities change. If you start building your retirement kitty when you are in your 20s, you could be overweight on equities (say 60 to 70 %) and this balance is reshuffled when you are in your 50s (with around 30 % in equities).
Sunita Srinivasan and her husband have taken this approach towards building up their corpus. They have invested in unit linked insurance plans with annual payout option, equity (ad hoc investments in bluechip stocks) and mutual funds. They have also invested in land.
Having your own property by the time you retire helps you save on paying rent. If you own more than one home, rental income can be a good source of retirement income. Priya and Prem have used this strategy. They have rental income from their properties as a part of their inflow after retirement.
There is no single product that can give you the entire targeted corpus. It has to be a mix
Finally, understand the tax benefits of any investment product. Your accumulated corpus must be tax free and only the payouts at the time of receipt will be taxable.
Estimating your needs correctly and following a systematic approach towards building your retirement corpus will help you during your golden years. So plan now and reap the benefits later.
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