You work really hard to provide your family with all the luxuries of life and secure their future. But what about your future? Isn’t that important too? You take a life insurance policy to safeguard your family’s future but, what about your life after 60? Many of us tend to procrastinate and then retire with not enough money to make ends meet. This is why retirement planning is important.
This article covers:
Need for retirement planning
Healthcare is expensive these days and will be even more after a few decades, given the current lifestyle and the high chances of more doctor appointments in the future. The bottom line is that you need money in your post-retirement life to pay for necessities. Also, to enjoy both, basic comforts and holidays, the sad part is your EPF or VPF won’t suffice. Retirement planning simply ensures financial security after you have stopped working at a certain point in life.
Importance of retirement planning
Retirement planning is as important as providing quality education to your children or living a healthy life. Here’s why:
- Increasing life expectancy: According to a study by the World Bank, life expectancy in India was ~41 yrs in 1960 which rose to 62.5 in 2000 and is ~69 as of 2018. This is clear evidence that Indians are living a longer life than they used to. Living longer has a cost, and for that, you need money. Now, for that, you need to invest regularly. Plan for it and start your investment journey at the earliest!
- Work has an expiry date: You cannot work for your entire life, and many professions do not allow you to work beyond 60-65 yrs of age. You stop working, and the monthly cash inflows stop as well. This is where the savings for your retirement will come in handy. Though there are options of SCSS or Senior Citizen Savings Scheme, you cannot solely rely on those since you can’t be putting all your eggs in one basket, that too after turning 60
- To fulfil your bucket list: Each of us has certain aspirations in life, such as taking a foreign vacation or starting a café business. We tend to put these things on our bucket list to pursue them once we retire. To make these aspirations a reality, you need money after you quit working, which is why retirement planning becomes important
- Medical emergencies: Certain health problems arise as you get old. Medical bills can eat up all your savings quickly. The worst part is that the healthcare industry’s inflation rate was at around 15% annually, accounting for a substantial hike in prices. Thus, to provide for medical emergencies, you need detailed retirement planning
Steps in retirement planning
If you are wondering how to start planning your retirement, here are some steps you can follow:
- Finalise your retirement age: In India, this age falls between 55 and 65, with the median age being 60 yrs. However, for self-employed and business people, the retirement age might differ. This step will help you ascertain the number of yrs you have before you take retirement. Further, based on your estimated life expectancy, you would know the number of yrs you need money for post-retirement
- Begin early: Don’t be a procrastinator; start your planning early in your career. This will reduce the burden which you will otherwise face if you start at 40-45 yrs. Compounding (or compound interest), known as The Eighth Wonder of the World, will not work for you if you delay your retirement planning as it works in the long-term only. Make retirement planning one of your financial goals if you want to enjoy financial freedom after you turn 60
- Decide on your retirement corpus: This is one of the most important steps in your retirement planning, wherein you have to determine the amount you need after you quit working. This amount should cover all your expenditure (fixed and variable), which you might incur once you are a senior citizen. To arrive at this number, you will need to compute the future value of your current expenses
For example, take Ramesh’s case, who is 35 yrs old and wants to retire at 60, and his current expenditure amounts to Rs 75,000 every month. Let’s say his annual medical and travel bills add up to Rs 5 lakh. Now take inflation in the economy as 6-7% and as 10% in medical bills to compute the future value of Ramesh’s current expenses.
- Forecast your savings: You also need to compute the future value of your current savings. This amount is what is left after deducting all your annual expenses from your yearly take-home salary. The next step is to compute this amount’s future value using the rate of returns on your investment as a factor
- Investment is key: What if the future value of your current savings and the retirement corpus don’t match? This is where the aspect of investment becomes vital. Financial advisors and money managers advise that saving money alone is not important; instead, investing it to generate returns also matters in the long-run
Based on your risk appetite, you have a plethora of investment options available in India, from PPF to mutual funds and gold to fixed/recurring deposits or equities. These investments will multiply your savings in the long term, and the compounding effect will ensure that you meet your retirement corpus goal.
When to start retirement planning?
The right time to start planning was yesterday! The next best time is today, just don’t leave it for tomorrow. It is always beneficial for you to start as early in your career as possible when you have limited liabilities.
For example, if you’re 25 and need a corpus of Rs 2 cr when you’re 60, you just need to save and invest Rs 3,500 each month in a scheme offering 11-12% returns. It will give you Rs 2.3 cr when you turn 60. But, if you start the same when you’re 30 yrs old, you will only receive Rs 1.2 cr when you’re 60. This is why you need to start your retirement planning early. Sit with your financial advisor and plan everything from corpus estimation to investment horizon. Choose suitable asset classes to invest in so that your money is safe even if the returns are not exorbitantly high. Security of your investments is the key here; don’t fall for quick gains and end up investing in a volatile asset class if your retirement is near.
However, if you have many years for your retirement, then equity asset class can be a good option to build your retirement corpus. This is because you have many years left to retire and compounding effects will work on your equity investments. There are many companies and online portals that formulate a plan for your retirement. In a nutshell, don’t wait to turn 40-45 yrs old. Start now.