Here are a few pointers that you need to keep in mind about How to be Successful at Retirement Planning”
Retirement Planning is an oft repeated topic in the domain of financial planning. It’s about securing your future and ensuring a comfortable post-retired life. Individuals tend to perceive retirement planning as a thing to be initiated just before superannuation. They go tremendously wrong in their approach and may have to compromise in future. Ideally, retirement planning needs to begin as soon as one starts earning.
Whenever the matter of retirement planning surfaces, individuals just escape. They feel that still a lot of time is in hand. They keep postponing the decision. At times, they put it on the backburner. The basic premise here is the feel good factor. Individuals forget that sooner or later their working capacity is going to end. At some point in time, they would have to hang their boots.
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You need to ponder over a few questions from now onwards:
How much would be the quantum of expense post retirement?
What is going to be the income source after retirement?
How would you provide for the medical emergencies in the retired life?
The need for Retirement planning emanates from the following issues.
The social and demographic structure in India has changed a lot post-1990s. Financial self-reliance is considered vital in every respect. The size of the families is shrinking with every passing generation. It implies lesser financial support in times of medical emergencies & otherwise. Unlike the west, there’s lack of social security, especially for the retired lot. The average lifespan in India has increased to around 75 years in the last two decades. So, this means you are going to live longer than your previous generation. It also implies an increased possibility of massive medical & healthcare expenditure in the ensuing years. Above all, as you will have a lot of time after retirement, you might think of pursuing your interests.
Apart from that, you can’t afford to ignore the effects of inflation. The prices of necessities will keep spiralling even after your retirement. Moreover, as you progress up the career ladder, you start enjoying a higher standard of living. It seems like luxuries of the past become today’s necessities. Additionally, the pension received from regular pension schemes wouldn’t suffice to take care of your post-retirement needs completely. In that case, you may have to switch to the previous lifestyle. It may, thus, become a highly agonising experience altogether.
Have you already started feeling the heat?
I would say you need not.
Instead of brooding over the issue, let’s try to solve it.
Phases of Retirement Planning
As regards retirement planning, your professional life is divided into two phases.
1. Accumulation Phase
The first phase is called the Accumulation Phase. It may start from as early as 25 years and continues till 60. It may be viewed as all those years when you are earning a regular income by way of salary. Ideally, retirement planning should begin in this phase. And that too; as early as possible. Here, the power of compounding needs to be underscored. It assumes that the earlier you start saving, the bigger would be your accumulated corpus.
In this phase you need to ask yourself a few important questions:
At what age do I plan to retire?
How many more years are left for my retirement?
What would be my monthly expenditure after retirement?
How big should be my retirement corpus to suffice this monthly expenditure?
How much do I need to contribute regularly to build this corpus?
In which avenues do I need to invest in building my retirement corpus?
Let’s try to find out answers by using a case study.
Suppose Aakash is 25-year-old unmarried man whose monthly salary is Rs 50000. He may estimate his current monthly expenditure to get an idea of life after retirement.
Rent = Rs 7000
Household expenditure = Rs 10000
Medical expenses = Rs 5000
Total monthly expenditure = Rs 22000.
Accordingly, the Annual Expenditure = 22000*12 = Rs 264000.
If we assume that he will remain in continuous employment & retires at 60 years; then his total working years comes out to be 35 years.
If he incurs an expenditure of Rs 264000 p.a. and the rate of inflation be 7%, then
Annual Expenditure post retirement = 264000 (1+0.07)^35 = Rs 28,18,618 (approx.)
Consequently, Monthly Expenditure post retirement = Rs 28,18,618/12 = Rs 2,34,885 (approx)
Let’s imagine that he lives till the age of 90 years after retirement. So, he requires a corpus at retirement that’s big enough to continue for 30 years and pays him a monthly annuity of Rs 2,34,885. If the corpus earns 8% rate of return, then present value of corpus is as follows
Present Value (PV) = [R{1-(1+i)-n }]/i
PV of Corpus required at the time of Retirement = [2,34,885{1-(1+0.08)-30 }]/0.08 = Rs 3,22,68,692 (approx.)
Now, it’s time to ascertain the contributions required to be made over the entire working life.
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If his monthly expenditure is Rs 22000, then his monthly saving would be Rs 28000 (Rs 50000-Rs 22000). Let’s assume he contributes Rs 8000 to his retirement fund for 35 years. Then, it becomes pertinent to ascertain the rate of return (i) required to accumulate the retirement corpus of Rs 3,22,68,692.
Rs 3,22,68,692 = [8,000{1-(1+i)-35 }]/i
Required Rate of Return (i) = 10.23%
Finally, based on the returns expected, he needs to explore the investment opportunities. The basic principals which apply here are as follows:
a. The higher are the expected returns; higher will be the risk that needs to be assumed.
b. The longer the investment horizon, the better are the prospects to invest in risky assets.
The diagram given below provides a glimpse of the entire phenomenon:
The investment options needs to be chosen as per the expected rate of return & risk profile. He may go for a diversified portfolio which consists of equity, debt and money market instruments. He also needs to rebalance the portfolio regularly to ensure that the overall returns & risk profile are in line with the expectations.
2. Distribution Phase
Distribution phase is the second phase of retirement planning. It is when you start receiving income from the fund that you set-up during your working years. In this phase, your working capacity declines and pension becomes the only source of income to sustain life. You may perceive it as the time to enjoy fruits of the tree which you planted way back in your youth.
As the time of distribution phase comes closer, it becomes crucial to adjust your portfolio strategically. There’s a strong reason behind this. You would not want your hard-earned returns to be swept away by untimely volatility. So, nearer the retirement age, you may place your corpus into safer avenues. The purpose is to get a steady income on a regular basis without loss in the value of the corpus. To know more click on the link below:
Top 10 monthly income investment options in India
It might happen that you were too pre-occupied all these while & couldn’t plan for retirement. You are now anxious about having a rough time in the retired life. You don’t see any options left to finance your post-retirement expenditure. You need not worry. Still, there’s some hope left. It’s called Reverse Mortgage Loan enabled Annuity (RMLeA). Under this, you mortgage your house with a bank. The bank will contract with a life insurer, and the insurer will estimate the worth of your home. Based on that, you will receive annuity payments for the rest of your retired life.
Also read: Reverse Mortgage Loan enabled Annuity (RMLeA): A better option over reverse mortgage loan (RML)
Final Words
George Foreman rightly opined that “The question isn’t at what age I want to retire, it’s at what income.”
You can lead a peaceful life after retirement provided you’ve planned for it in advance. By following the said guidelines, you would be able to create a corpus good enough to retire happily.