The First step(s) for retirement planning

All of us are worried about paying off our home loans, children’s education, or buying a car. In this eventful life, many of us either forget or procrastinate planning for our retirement. You must understand that retirement planning is the only key to remain financially secured and maintain a comfortable standard of living even in the later years of life, where you may not draw regular flow of income. You see, planning for retirement can keep you financially independent even during your golden years, taking care of day-to-day expenses as well as any medical emergencies that may arise as age progresses. But to do that prudently, one needs to be disciplined and invest wisely at various stages of life. Here’s how:

  1. Young Age: Most of you who are in 20s and having recently started earning might think that retirement is a distant reality. Planning for it at this early age might seem like being overly cautious. However it is imperative for you to recognise that being young provides you a benefit that is not available to all, ‘time’. As it is said, “the early bird gets a bigger pie”. You see, beginning to invest early in life will enable you to accumulate the necessary corpus required for your retirement through the power of compounding. Consider the following example here:Mr X, age 25 years and Mr Y, age 35 years aspire to save Rs 5,000 per month each till they attain 60 years of age. How much would each of them accumulate when they turn 60 years old?
    Details Mr X Mr Y
    Present Age 25 years 35 years
    Amount invested per month Rs 5,000 Rs 5,000
    Rate of Interest 12% p.a. 12% p.a.
    Corpus at 60 years Rs 3.25 Crore Rs 94.88 lakhs

    As illustrated above, due to a difference of 10 years, Mr X achieves a larger corpus of 3.25 crore, whereas Mr Y, manages to accumulate relatively lesser i.e. Rs 94.88 lakhs at the age of 60 years (assuming an interest rate of 12% per annum). So the early you start planning for your retirement, the better it is.

    When you enter this stage, first determine the corpus you would require post retirement and then calculate the amount you should be saving each month to accumulate that desired corpus. Once you have determined the amount to be saved per month, it is vital that you also develop a plan to allocate and invest your savings. Being a young investor, you can allocate a large percentage of your portfolio in risky asset classes, such as equities and real estate. This is because; you have ample amount of time and opportunities to recover from any possible setbacks in the value of the portfolio. But remember to invest prudently in risky assets, as this would lessen probability of loss to capital and instead earn high returns for your retirement portfolio. Many young investors park their entire savings in safe instruments such as government securities, fixed deposits etc. You see, investing in conservative instruments will give you conservative returns, which might not help in building the desired corpus in time and hedge inflation.

  2. Middle Age: In your 30s or 40s you are mostly climbing the corporate ladder and earning a higher income. But, you also have added responsibilities such as home / car loan, raising your children and saving for their future, taking care of your parents in their old-age and so on. When you are in this phase, it is important for you to have a clear picture of your financial goals. However, retirement planning should not take a back seat in lieu of meeting other goals. It is imperative to remain focused and maintain consistency in saving for your retirement. Infact, with an increment in salary or profits, you must also increase the amount of contribution you make to the retirement kitty. Never withdraw from this account for meeting other costs such as holiday expenses or children’s college education. You see, planning and saving separately for other expenses including life or health insurance premiums or medical emergencies such as accidents or illness, will largely help you in creating and retaining the desired retirement corpus.If you have already reached this stage and have not yet started planning or saving for your retirement, then it is high time you began. Considering the fact, that you still have many working years left until retirement your asset allocation pattern will not change much from the previous stage. You can also consider investing in tax deferred instruments which will attract lower taxes when redeemed post retirement.
  3. Nearing Retirement: When you are in the 50s age group, you have reached the pinnacle of your earning potential. By this time, most of your major outlays in life such as home loans or children’s college education are already behind you. Hence you can increase the contributions towards your retirement goal to a great extent and also save a large portion of your monthly earnings. Use this as an opportunity to give a last booster for enhancing the retirement corpus.However when you enter this life stage, asset allocation is something that you need to be overly cautious about. This is because you have fewer number of working years left to cover up any monetary setbacks that your retirement portfolio might suffer. Hence although a small portion of your portfolio can be exposed to risky asset classes, the remaining must be shifted to relatively less volatile asset classes such debt and gold.
  4. Already Retired: If you have crossed the benchmark age of 60 years, then most of you have already retired or may considering retirement soon (after some extended years of work life). And here it must be borne in mind that although you have retired or retiring very soon, the retirement planning process has not ended. You need to calculate the amount you will withdraw per month based on the corpus you have accumulated and your present health conditions. Some of us might also consider working part time post retirement or doing some small business of our own. You must review your investment accounts periodically and ensure those inflows, if any, are prudently parked. You should keep atleast 6 months – 1 year of expenses in your bank account or in a liquid fund to meet day-to-day expenses. Moreover, most of your portfolio should be invested in safe asset classes to protect it from market volatility. You don’t want to see the savings of your lifetime to get eroded and depleted due to turbulent market conditions.

Every individual may have a different view of how they wish to spend their retirement years. While some may want to buy a retirement house in a beautiful country side; some might want to travel the world. Hence the cost associated with retirement will be different for every individual. Based on your life expectancy and retirement plans, you must start investing for this goal from an early age. It might also be prudent to consult a financial planner to help you plan and execute this systematically.

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