Starting a new innings in your retirement
Retirement is like tomorrow’s sun. It will happen – whether you like it or not. It is as certain as any other fact of life. You, therefore, must be ready for it: mentally, physically and of course financially. In fact, there is a strong case for you to start preparing now, right now. So whether you are in the age group of 30 or 50: retirement planning is equally important to each one of you.
The retirement planning fundas
Retirement planning is a means and an end. Means: because it shows you how to open the door to freedom and exhilaration. End: because it propels you towards what you consider are the cherished goals in life. It creates the bedrock on which your choices stand today. These choices can stem from your normal everyday activities as well as your ambitions and objectives. What are the choices that we referred to? Well, these do vary from individual to individual. Considering the fact that no two individuals will have exactly similar choices, we can work out an unending list. However, here are some of commonplace ones, pertaining to both pre- and post-retirement.
- How should I plan for marriage / higher education of all dependents well before I retire?
- How should I plan for home building?
- How should I budget for my post-retirement years when medical costs will be much higher?
- How should I buy mutual funds, keeping in view my large one-off expenses?
It is clear that a retirement plan will need to have multiple elements. Individually, each will serve as a brick, to be used in constructing an edifice – the plan per se. Creating strategies for retirement is the most essential component of the plan. Why? The reason is not hard to find: The kind of planning you do now (i.e. before you actually retire) will determine the kind of life you will lead after you move away from active work. The logic is as simple as that.
Why should I plan for retirement?
The one thing for sure is the cost of living. The only way it will go is north. Services that you need will be more expensive. Medical costs will soar. Hospitalization will cost the earth. Food prices will spiral. You will have to live with all that and more. More? Yes, remember, with better health facilities (courtesy, advances made by medical science) you will probably live longer than what may be expected.
Let’s take an example here:
Say a pack of toothpaste now cost you Rs. 50/- and your family uses a pack a month – totaling Rs. 600/- a year.
Now if toothpaste price inflates at 10% per annum and if your family wishes to maintain their current lifestyle and use toothpaste 30, 40 and 50 years hence – the respective cost would come to Rs.10000/-, Rs. 27000/- and Rs. 71000/- p.a. (sounds weird – but it’s true). Now if this happens when you are at job is still ok – but when the rise happens when you are no more working will have serious repercussion. And remember this will happen not only to your toothpaste but to each commodity, you are using today. How to manage then is a challenge: we need to face now. The question is How- and that is what we will solve here.
The basic inputs to create a retirement plan
Let’s define retirement planning as the manner in which an individual plans for the years during which he ceases to do routine work that had in the past generated regular income. Not a very subtle definition, that. However, to appreciate it in all its nuances, you need to consider a few major needs.
- There is need for creating a fund, which needs to be invested wisely as well as sub-divided and earmarked for definite objectives
- The investments done by the fund need to cover expenses that a retired person will incur on a running basis
- The investments need to create a surplus over time, which, after expenses, needs to be invested further for one-time expenses.
Indicate to the retirement planning calculator
Putting a number to your goal
An individual, during his pre-retirement years, will have to set clear goals (as early as possible), which must be translated into numbers. What are these numbers? Such numbers spawn mainly from the amount of money needed to cover expenses, keeping in view possibilities like escalating prices (inflation) and taxes.
Indicate to the FV calculator
Connect your goals with proper asset allocation.
If you are in the age group of 25 to 40 – you may allocate the major chunk to Diversified equity fund or Equity Index funds. These funds historically beaten inflation over a longer period and created wealth for their subscribers. A relatively small part of your allocation will remain in debt and liquid fund.
Click here to know more about Equity Funds
However, if you are in age group between 40 to 60 years– you will be more comfortable with a balanced approach. Ideal choice here will be a balanced fund, which will do the equity debt balancing automatically for you.
Click here to know more about Balanced Fund
However if you are already retired and reading this article: there is a takeaway for you. As you would need a regular income, allocate a large amount to Monthly Income Plan (MIP Fund). The rest can be split between an Index Fund (which will give you small growth) and Liquid Fund.
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Consider these four elementary facts:
- People are living longer, thanks to improved health standards.
- Due to sporadic job changes – the income of individuals are more volatile
- The life style needs have been upgraded
- And, in the market, the returns from various investments vary widely.
In this backdrop, the case for retirement planning is stronger. In fact, all these issues have actually led to greater consciousness about retirement planning.
The fifth critical point is the reduction in numbers of of guaranteed-return investment schemes. Except for a very few cases, there are no guarantees linked to an investment anymore. Few years back, these secured schemes were more popular and occupy majority of one’s investment allocation. However the present day investor is seeking newer alternatives like mutual funds (MF), which came up in a big way in recent times. While MF doesn’t guarantee return, it is considered as an investment vehicle which gives superior risk adjusted return in the longer term.
The bottom line there is no fast, easy way to know exactly how much you'll need to retire in style. The effort you devote to understanding it now will be invaluable in drafting a retirement plan that will pay real dividends in your golden years.
Shortcut to your retirement success
Figure out the income you'll need. Start by nailing down the annual income you'd like to have in retirement. Some people use a ballpark figure of 70 to 80 percent of pre-retirement income… but this can be too low, especially if you have plans to do a lot of traveling or other expensive hobbies.
Figure out the total amount you'll need. Once you know the annual income you'd like to have, you can figure out the amount you'll need to generate that income. Figure an annual withdrawal rate in the 5 to 8 per cent range.
Figure out if you're on track. You next need to know if you're saving enough right now to accumulate the nest egg you'll need. For the math use our RETIREMENT PLANNING CALCULATOR. These statistics might interest you:
- If one invest Rs. 1000/- a month for 25 years the wealth may grow to Rs. 16.00 Lakh (at 12% pa ). But if he delays his investment by 5 years – to achieve the same investment of Rs.16.00 Lakh – he needs to invest Rs.1850/- a month for 20 years. This is 85% more than Rs.1000/-
- Again if you are investing Rs. 1000/- a month for 25 years at 8% pa - your wealth may grow to Rs. 8.80 Lakh. But if the same investment is made at 12% pa - the wealth may grow to Rs. 16.00 Lakh – almost 82% more. So choice of investment classes is vital.
The bottom line – Start early, save regularly and choose your assets judiciously.
Benchmark your progress. Once you have a plan in place, check in occasionally to ensure that you're on track and make any adjustments as necessary.
Disclaimer: This information is given for general purposes only. These views alone are not sufficient and should not be used for the development or implementation of an investment strategy. It should not be construed as investment advice to any party. All recipients / readers of this material should before dealing and or taking any decision of investment are advised to carefully review the Scheme Information Document and consult their legal, tax and financial advisors before making an investment decision. All opinions and estimates included here constitute our view as of this date and are subject to change without notice.