Do you believe that by failing to prepare, you prepare to fail?
Is the image of your future, 20 – 30 years from now, involve you and your partner as 60-year olds, chilling on a beach, a hill-station or even in the living room of your house?
Or do you prefer to live in the moment, and making the most of whatever comes your way?
If you are the kind that thinks about the future, then retirement planning is definitely on your mind. There may be moments of self-doubt - “Am I doing it right? Will I be able to retire with Rs.10 crores so that my golden years are comfortable?” This is probably why you are on a search for lucrative investment avenues to bolster your retirement fund. In this case, researching retirement plans or speaking with experts or seeking counsel from other retirees are probably some things you have done.
However, if you are the kind that lives in the present, without a thought for the future, have you considered whether you could maintain your current lifestyle 20 or 30 years from now? Assuming you wouldn’t be working as actively then, where will you get the money to pay for necessities such as food, clothing, medicines and utilities, while indulging in a few luxuries? Do you see yourself relying on your children or a fixed deposit for financial support?
- Your current annual expenses of Rs.3 lakhs would cost about Rs.20 lakhs 30 years from now because of inflation (7%).
- Assuming you are retired at that time in the future, you would rely on the pool of savings you have.
- The pool is the collection of returns Rs.(Rs.8000) you earned in the 30 years of your earning life on an investment Rs.Rs.(Rs.1 lakh) you had made back then.
- Notice, it could only provide for half of your projected expenses estimated at 80 – 90% of your current living costs.
Do you still NOT believe in retirement planning?
The answer lies in the preparation for planning a corpus that sees you through your retirement years. You need to prioritise your retirement plan, and this needn’t necessarily be at the expense of an active social life. In fact, if you prepare and plan well, not only can you dine out and travel with friends and shop for things on your wish list, but you can continue living the same lifestyle in your golden years too.
Here are 3 steps that will help you to work towards retirement planning:
Step 1 – Accumulate – ‘a penny saved, is a penny earned’
Make saving a priority: It is the first day of the month and you get a bank alert that your account has been credited with your salary. As you immediately get down to writing cheque(s), withdrawing cash, making transfers for rent, groceries, utilities, etc., move 10% (of the amount credited) to a savings pool. And do not consider dipping into this pool.
Start an automated SIP (Systematic Investment Plan) through an ECS (Electronic Clearing Service) mandate to your bank to ensure you do not miss allocating and investing.
So, if you save at least Rs.Rs.5000 every month when you’re 25, then in 35 years, you will retire with a corpus of at least Rs.Rs. 1.15 crores, assuming an 8% annual rate of return. And if the monthly savings increase with every annual salary hike, you could build an even larger corpus.
Minimise debts to accumulate more: Loans and credit card are as easily available as groceries. The idea is lucrative—you can own a premium watch, laptop, smartphone, or shop for luxury brands and pay for them later. However, you are paying much more than the retail price of the product. The excess would not only limit your savings capacity but also expenditure on the luxuries you could afford earlier. Additionally, there are no tax breaks on personal loan EMIs or credit card debt repayments.
So, if you were to take a personal loan of Rs.Rs.1 lakh that would cost you more than Rs.Rs.9,000 per month. Let’s see its impact on your retirement planning.
Notice how the EMI impacts your capacity to save and spend comfortably and prudently. Since you have to repay the EMI, you eventually struggle to save and spend!
Instead you could continue with building your pool of regular savings and dip into this to purchase whatever you need in the future.
Create a list of retirement goals: The power of goal-setting helps you focus your efforts and organise your resources effectively. This makes it essential that you create a list of retirement goals, and don’t hesitate to make changes as the years go by.
Retirees who remain active, healthy and continue to create (crafts, cooking, writing, music, painting, etc.) live happier and more fulfilling lives. You should also be prepared for financial, medical, and personal exigencies because of death of spouse, health conditions, and investment misfire, to name a few.
Step 2 – Invest – Let your money work for you
Undertake a financial risk profiling exercise: Regardless of your age, running a financial risk profiling exercise can help you determine your risk appetite. It can also enable an understanding of the expected returns, and therefore the potential wealth you can create. The results can help you shortlist appropriate investment products to accomplish your financial goals based on your requirements and risk appetite.
So, as you approach your retirement age, you may want to invest in products that have moderate to low risk.
Make a gradual shift to include balanced funds: As you grow older and financial commitments increase, make a gradual shift to include balanced funds, and finally move to low-risk debt funds towards the end of your working life. It is recommended that you consult a financial advisor to identify the right mix of debt and equity funds to suit your risk profile and financial goals. You must also plan for the reduction, or ideally the complete elimination of debt.
Moreover, you can get tax benefits for your investments as per prevailing tax laws.
Step 3 – Reap – Enjoy what you have sowed
In the reaping phase, there are unit-linked pension plans where one-third of the corpus is paid to you while the remaining is invested in an annuity scheme. At the end of the second phase, your investments, along with the benefits from the scheme are paid to you at regular intervals. If you choose to, you can cash in a proportion of your pension immediately, with the rest invested in an annuity that brings you a monthly or yearly income.
If you have been following the steps, then let’s revisit the retirement plan that had fallen short of expectation.
Therefore, the time you spend on investment plans and financial planning is not an end, but it is a means to a comfortable retirement in the future. With disciplined investing and financial planning, you can enjoy the fruits of the many years of hard work and your days can be filled with travel plans, hobbies and spending time with your family.