When thinking of retirement, everyone has a different picture. But, what no one wants to think of is retirement planning. Retirement needs both personal and financial planning. It requires both satisfaction and budgeting. It is a stage where an individual is no longer working. Retirement has to be carefully planned out. Since there is no incoming income, it is important to have enough funds to sustain. This is where retirement planning comes in. It gives you a chance to plan and save for this stage in life. The Why, When, and How of the Retirement planning are all explained in this article.
Why Should You Plan Your Retirement?
Retirement is a phase of life where an individual is no longer working; thus, they no longer have a regular income. It is also a stage where they may not be physically sound enough to work. According to the National Health Profile 2019, the life expectancy of an Indian was 68.7 years old. The average age to retire in India in 2019 was 60 years. So, to sustain themselves for their remaining life, it is very important to plan. Some reasons for this retirement planning are in detail below –
1. To Cover Living Expenses:
Living expenses do not vanish after retirement. They are very much present even if you don’t have a regular income. Even if you get a pension or some gratuity, it is not enough to cover all your expenses. Every family has a standard of living that they have maintained. Not having planned your retirement can make families compromise on this.
2. To Cover Medical Expenses:
It is common knowledge that as one’s age increases, they are more susceptible to medical issues. It becomes more important to save with this higher chance to need medical treatment. Medical expenses are very notorious to exhaust one’s entire life savings. It is important to ensure that you never compromise in regards to your health. Having money set aside for medical expenses in retirement savings will do that.
3. To Counter Inflation:
As the years go by, the prices of goods will also increase. Inflation can have a very bad effect on one’s life savings. No matter how small, it can have a massive effect. Even a 5% inflation can bring down 21 lakhs to 7.5 lakhs in 20 years. This means that planning and investing your savings are very important. Storing it all in your savings account can be detrimental. If you are not smart with investment, the cost of necessities will be too high for you.
4. To Have A Back-Up:
There is a growing trend in India to work for private sector companies. Thus, the days of getting a state-sponsored pension are long gone. The government does offer some benefits for senior citizens, but that’s about it. Along with the rising trend to have nuclear families, the elderly have to look out for themselves. In case of any emergency, they will likely have no family to turn to.
5. To Meet Their Life Goals:
Everyone has different goals and expectations for their retirement. For many, it is going for a world tour, and for others, it is spending more time with family. Whatever this maybe, if you have saved in your working years to make your dreams a reality. This ensures that all your goals for retirement planning are not hindered due to finances.
When To Start Your Retirement Planning
The earlier one starts planning and saving, the better. The recommended age is starting is in your 20s. The most common age is around 25-30 years in India.
The interest rates on investments compound annually. Because of this, there might not be a massive earning short term. The amount you invest may exceed your interest generated.
But, because of this compounding effect, you will see the benefit long term. Your earnings will bypass your invested amount by a very large margin.
This is because the money you invested grows much faster in the later years. Thus, the longer the period of an investment is, the better. Since we can’t control the withdrawal day, we can choose to start early.
To highlight the difference a few years can make, here is an example.
i. Geeta decided to start investing in her retirement when she was 25 years old. She invested 5000 per month in mutual funds. Her investment gained her a return of 12% for 35 years. When she finally chose to retire at the age of 60, she had 3.24 crore.
ii. Reema decided to start investing for retirement when she was 30 years old. She invested in the same mutual fund as Geeta and paid 5000 per month. She also gained a return of 12% for 30 years. When she retired at 60, she has 1.76 crores.
This delay of 5 years caused Reema’s corpus to become half of Geeta’s. This is due to the compounding nature of interest rates.
Thus, while reiterating, the longer an investment is, the bigger returns you get.
Planning your retirement depends on you, your lifestyle, and your goals. No fixed plan will suit everyone. There are a few basic questions one should ask themselves. Everyone will have different answers bases on their lifestyle. It is important to answer these questions honestly and to the best of your ability. The questions are –
1. When do you want to retire?
2. How long will I live?
3. What is my monthly expenditure currently?
4. What will be my expenses after retirement?
5. Do I have adequate insurance?
6. What is my current retirement portfolio?
7. What is the current and expected inflation rate?
8. Do I have a way to generate cash inflow during retirement?
9. How do I want to spend my retirement?
These are some of the questions you MUST answer; there can be many more. These will help you get started. It will help you get some clarity about where you stand. It shows you your starting (current) point and the finishing point. The journey to reach the finishing point starts now.
How To Do Your Retirement Planning
Now that you have a clear picture of your finances, the retirement planning starts. Given below are steps to follow to plan a happy retirement. These steps will give you a basic guideline to follow to have a retirement plan that is built for success.
Step 1 – When To Retire:
In 2019, the most common age to retire was 60 years old. Despite this, the age you want to retire depends on many things. Of course, the main factor is your choice. This depends on your goals and expectations for your retirement.
Another very important factor is your life expectancy. This depends on your current age, medical history, and other factors. This is important to take into account. It gives you an idea of how long you need to save for. It gives you an estimated time frame.
The World Life Expectancy presents the following table. This will help you get an idea. It helps you understand how long your post-retirement life will be.
Step 2 – The Amount You Need:
The size of your retirement corpus is very important to determine. It is the money you need after your retirement to sustain you and your family. This amount will help you lead the life you currently lead. The correct corpus will ensure that you have a comfortable retirement. Miscalculating this amount can have disastrous effects. The worst can be, is being unable to meet basic expenses. You can calculate this in a few ways. Some prefer to do it on their own and others through financial planners. Many also opt to use an online retirement calculator to do this.
Step 3 – Calculate The Value Of Current Savings After A Few Years:
Most interest rates on investment schemes get compounded annually. This means that initially, the returns may not seem much, but increase long term. Thus it is important to calculate the returns you’ll get after a few years. This will help you understand whether this amount is enough or not.
This step is better understood through an example.
Ram invests 1 lakh in investment for his retirement fund. He hopes to have 50 lakhs as his retirement corpus. This investment generates a 10 % interest rate. He wants to retire in 25 years. Thus this investment will generate 9,834,706. This calculation gives him clarity. He understands that to attain his desired corpus, he needs to invest more.
If he had not calculated, he would be under a delusion that this investment is enough.
Step 4 – Make An Investment Portfolio For Retirement:
After looking at your savings, the next step is to look at your retirement portfolio. If you do not have one, this is a vital step. Building one depends on your age and risk tolerance. Both these things will help decide what investment suite you.
Like every financial adviser will tell you, build a diversified portfolio. Do not put your eggs in one basket; distribute them. Do not put all your money in safe investments. Or all in risky investments. Divide it thoughtfully. Investments that give inflation-adjusted returns are helpful in case of retirement. Mutual funds, equities, deposits are gold are some good investments.
Many take the help of financial advisors and risk consultants to do this. They will help you with risk profiling and asset allocation. The structure they provide will help you reach your desired corpus. It is possible to this on your own also. One will need thorough research and knowledge for this.
Step 5 –Revise Your Investments As Needed:
It is important to look at your retirement planning once in 6 months (or 1 year). This will give you an idea if this plan is working for you or no. If there a sudden increase in one of the assets, you can adjust the others accordingly. Changes like income, expectations, retirement age can also change your plan. These changes are all welcomed and encouraged.
Many people make a retirement plan themselves. After a few years, they realize the plan does not fit their needs. At this point, it is wise to contact a financial advisor. They can help and guide you to improve your current portfolio.
This online tool helps give an estimate of how much you should save for retirement. You can also use it to find the value of your current expenses in some years. This calculator simplifies a very important step in this planning. It helps you break down how much money you need for your retirement.
The questions it asks help calculate the amount you to save for retirement. The questions usually for retirement planning are;
b. Retirement Age
c. Life expectancy
d. Current Retirement Fund (CRF)
e. Expected Growth of Retirement Fund
f. Inflation rate
g. Post-retirement expected inflation
h. Monthly Income Required during Retirement
i. Expected Return in Investment (Pre-retirement)
j. Expected Return on Investment (Post-retirement)
k. Risk Profile – Low, Moderate, or High
l. Current monthly expenditure
- Monthly rent
- Household expenses
- Food Bills
- Expenses on children
- Shopping and recreational
After answering these questions, the calculator gives these three figures:
1. Total Retirement Fund (TRF) –
This is the total amount you will need for your retirement. The size of this fund is enough to manage expenses during your retirement. This value comes by taking into account the expected growth rate of funds and inflation.
2. Additional Retirement Fund (ARF) –
This is the additional amount you need to save. This, along with your current retirement fund, make up the total retirement fund.
3. Monthly Investment Required (MIR) –
This is a very important feature of this calculator. It gives you the amount you should put in your retirement fund every month. These monthly payments are what the additional retirement fund will hold. Without being diligent towards this, saving for retirement will be hard.
Investing For Your Retirement Fund
Some financial advisors break down investing for retirement planning in 2 stages. These are accumulation and distribution stages.
i. Accumulation Stage –
This is the first stage. In this, individuals save and try to build their retirement fund. All investment options aim to do that. The longer this stage, the better. This is because of the compounding nature of interest rate. This will result in a larger retirement corpus. Some places to invest during this period are –
- Employee Provident Fund
- Employee Pension Scheme
- Voluntary Provident Fund
- Public Provident Fund
- National Pension Scheme
- Mutual Fund
ii. Distribution Stage –
This is the last stage. In this, the retired individuals further invest the money they generated. The idea is to use the money. The motive is so that the investment generates a consistent income. The investments are more conservative and safe. This is because there is no other income to depend on. Some investment options are –
- Senior Citizens Saving Scheme
- Post Office Monthly Income Scheme
Problems One Faces While Saving For Retirement
When you are doing retirement planning there may be some problems like
a. Starting Early:
In the beginning, allocating money can seem cumbersome and like a burden. It might feel unnecessary in front of other immediate financial matters. These can be expenses on your child, home, luxuries, etc.
There is a remedy for this problem. Start investing a minimal amount into your retirement plans. This amount depends on you, which doesn’t pinch you. The amount is not very important. Starting to invest is. Once you have addressed your pressing financial matters, you can start investing more. You can increase the amount every year.
b. Constant Tracking And Monitoring:
After investing, comes the common problem everyone faces. Constantly checking and tracking your investment. This can be very bad for your mental health. Watching the market go up and down can make your emotions do the same! Once invested, check your investment once in 6 months.
c. Save Now, Spend Later:
It is tough to save when your expenses exceed your earnings. Spending less than what you earn is the ticket to a good retirement corpus. To ensure that this is not happening, identify where you spend the most. For most people, it is food, travel, etc and cutting these out is not completely possible. But reducing the money spent on these things is. Living frugally will seem hard but will also give the best returns.
This also includes spending money that you could’ve saved. The most obvious instance here is tax returns. Many people overlook this and end up paying more. The many provisions in the Income Tax Act help you get some money back. Section 80C is very popular for tax returns it offers. Salaried employees have some additional tax- free benefits. It is important to tap into such readily available resources. To save more, it is important to become smart with your money.
Frequently Asked Questions (FAQs)
1. I am currently 40 years old. Is it too late to start a retirement fund?
It might seem late, especially because the recommended age is 20s. But, it is never too late to start a retirement fund. You will have to strategically invest to catch up to the others. These are some things you can do-
i. Save as much as possible
ii. Cut down on expenses
iii. Invest aggressively
iv. If possible, delay your retirement
v. Re-think your retirement goals and expectations
2. What happens to a retirement fund if I die before using it?
There are three scenarios that may occur
i. The fund goes to the spouse.
ii. If single and named a beneficiary, the fund goes to them.
iii. If single and not named a beneficiary, the fund becomes a part of your estate.
3. Is it a smart decision to borrow from my retirement fund to start a business?
No. There is no guarantee that the business will take off of not. If it does not, there is no fallback option for you. If it does, you will have to start your retirement fund again. This will not be beneficial in the long run. There are provisions from the government to get a loan for a small business.
4. Can I use my retirement fund to finance real estate?
Yes. Using this fund to buy, build, or even rebuild real estate is possible. This is also considered to be an investment.
Retirement planning is an essential step in financial planning. It gives one a peace of mind that their future is secure. One should not overlook or ignore this investment. Planning your retirement can be a daunting task. This article aims to simplify this and provide you all the information you need.