A working person has to do retirement planning while young and active. Retirement planning is very important for peaceful life post-retirement as an individual cannot work forever to earn his income, especially the salaried class.
What is Retirement Planning?
Retirement planning is a process of creating a fund over a period of time which will give desired income after retirement. In fact it should part of your overall financial planning. There is a method to arrive at the estimated income that you would reach at the time of retirement, based on current income. Once the pre-retirement income is calculated, next step is to calculate how much money needed to invest now onward so that it can give an income equivalent to pre-retirement income.
Why do you need retirement planning?
Time moves very fast. Often we stay too busy enjoying the present life rather than thinking, planning or working for the future. Therefor if you don’t plan ahead for retirement, it will be difficult to create a fund within a short period. This is precisely why you need retirement planning. There are 4 (four) factors that immensely impact the post retirement life.
Medical expenses
With growing age comes new health challenges. Medical expenses make a huge dent in our finances post retirement. Studies show medical inflation is 14-15% a year. This means health costs potentially become 4 times of what they were just ten years ago. With a large retirement fund or income, post-retirement we will be well-positioned to handle the situation.
Rising inflation
Price rise is a universal fact. The effect of inflation, even if it appears small in the short-term, can have massive impact over long term. For example an inflation of 5% means ₹ 100 will value ₹ 95 a year later. But, a sum of ₹ 20 lakh after 20 years will have the same purchasing power as ₹ 7.5 lakh today if inflation is at 5% every year. Any growing economy will have an inflation of around 3-5%. At time it may go beyond 5%.
Lack of Government pension scheme
Unlike the US and UK where they have state-funded/sponsored pensions or social security benefits during retirement, India so far does not have anything similar matching that scale. Though National Pension scheme is introduced by Government of India, it is a contributory scheme. It means, it has to be subscribed by the beneficiary with his or her own contribution. This means you are on our own when you retire.
Declining family support
Long gone are those days when the elderly could rely on monetary support from a big family. The culture of the Indian families is changing as couples are going nuclear and staying separately. They are also having less children. Twenty-thirty years down there may not be many relatives to take care of us as a senior citizen. Children, when they grow up, want to relocate for jobs elsewhere. Plus, the pressure to earn money and have a decent lifestyle would not give them enough time to allocate for parents and elders. Hence, it is vital to have our retirement planning without expecting any financial help from your immediate family.
What are the steps to retirement planning?
Retirement planning prepare us for a life after salaried life ends. Such planning has some key components. Let us have a look at them one by one.
Firstly, we need to set our retirement goals. Arrange these financial goals into short, medium and long-term. Most of these retirement goals will require financial resources. This is where a retirement plan or pension plan comes in handy.
Second, assess our current financial position. At the age of 30-35, our financial situation will be very different from, say, somebody who is in their late 20s or in the early 40s. To achieve our retirement goals, we need to take stock of our current situation. Don’t worry if you have not been able to save much so far. The good thing is that you want to save.
Three, calculate the amount of money you will need for your retirement goals and account for the help you will get from current wealth. This should give you a proper amount. When done right, retirement planning will try to get you as much close to this number as possible. People who have accumulated some money so far may even reach their retirement goal faster. So, you can retire at age 55 instead of 60.
Four, identify retirement corpus builders. Apart from your provident fund and savings, one of the best ways to get a recurring income post retirement is by using a retirement plan. These plans fall under the category of life insurance plans. They are designed to meet your post-retirement needs.
Five, set up a system to generate monthly income from retirement corpus. As a salaried person, you are habituated to getting income from your employer or from a business. With the onset of retirement, the pay cheque has to be arranged by you. A simple way to do it is taking an immediate annuity policy by investing your retirement corpus. This will ensure that every month a fixed sum of money comes knocking on your door. By giving you fixed income at regular intervals chosen by you, you can live a comfortable life in your golden years.
When to start retirement planning?
Like all planning, retirement planning too needs to be done beforehand. With the average work life being somewhere between 30 and 35 years, the best retirement plans are often started at the early age. This does mean that retirement planning and execution happens across different life stages. When done right, you enjoy the fruits of the retirement plan set in motion years ago.
Imagine a 25-year old person starts planning for a retirement corpus of ₹ 2 crore. He or She will need the money at age 60 years or 35 years from now. By investing just ₹ 3500 per month in an investment avenue that fetches return of 12% per year, the 25-year old will cross the target and attain ₹ 2.3 crore. But if he decides to start the same plan just 5 years later i.e. when he is 30, he will reach just ₹ 1.2 crore i.e. half the corpus by 60. A small delay of 5 years makes a world of difference as you can see. So, it pays to start early.
A proper retirement plan will be divided into investment phase, accumulation phase and withdrawal phase. In the first phase, you save and invest money. This will likely be in your 30s to early 50s.
It is important to choose the contribution and duration of contribution during investment phase. For instance, saving ₹ 3 lakh a year for 20 years is not tough for somebody with ₹ 12 lakh annual income. Saving 25% is achievable. Be practical about saving because your financial responsibilities may go up later due to home loans, marriage and children’s expenses.
As we near the retirement age, one has to ensure that the entire corpus slowly moves away from risky assets to safe assets. When you reach retirement, the focus should be on milking this entire corpus. This can in the form of staggered withdrawals or monthly income source. Choose a retirement income plan that allows these flexibilities.
All in all retirement planning has to start early when you are young and able like your heydays.