When you retire, you will no longer receive your pay check on the first day of the month, but your expenses will need to be met and may probably even rise. It is therefore imperative to create a retirement plan in order to fund expenditures – both expected and unexpected.
Why Do you Need to Plan for Retirement?
With longer life spans, retirement could last for a few decades. A report by World Bank states that the average life span of an Indian has risen to 68.56 years in 2016 from 62.58 years in 2000. Longer life spans means a longer retirement period. You do not want to embark on the journey of retirement unprepared! Inflation can prove detrimental to your retirement financial planning. As inflation rises, the prices of goods and services rise commensurately. Though everyone is impacted by inflation, the blow is greater for retirees who no longer have inflation-adjusted earnings to accommodate rising costs. Furthermore, retirees usually tend to experience higher healthcare costs due to various age-related afflictions. This too results in higher expenses during retirement. To meet these costs, your assets need to generate a higher rate of return than the inflation rate.
Steps for Creating a Retirement Kitty:
Retirement planning is a lifelong process which involves taking different actions at various phases, both before and during retirement. Here are some steps that you can take to create a retirement kitty:
- Understand your time horizon
Two important data points for formulating an effective retirement strategy are your current age and the age you expect to retire. This will help determine the time frame you have to create a sufficiently large retirement corpus.
- Fix a target retirement corpus
This is the lump-sum amount that you will require when you retire to meet all your expenses, assuming you want to maintain a similar lifestyle and achieve other personal goals. First and foremost, you have to make a realistic estimation of your future annual expenses. It is very important to factor in inflation to estimate the future value of money required to meet your sustenance needs. This can easily be ascertained with the help of a retirement planning calculator. For instance, let’s assume that you are currently 25 years of age and want to retire by 65, and your current monthly expenses are Rs 50,000. Assuming a life expectancy of 80, inflation at 7% per annum, and a rate of return of 12% per annum on your investments, you will require a retirement corpus of around Rs 10.99 crore. To achieve this, you will need to invest about Rs.19,500 each month.
- Start investing now
The key to successful retirement planning is to start early. The earlier you start planning and setting aside money for your retirement kitty, the easier your path to retirement is bound to look. Time provides you with the magical tool of compounding! Let us take an example of two individuals, one of them starts investing an amount of Rs 1,000 at the age of 25, but the other only begins at 35. Assuming a rate of return of 12% compounded annually for both of them, by the time they are 60, the former would have accumulated an amount of Rs. 64.95 lakh while the latter would have accumulated only Rs 18.97lakhs! Therefore, the sooner you start investing, more time you will have to reap the benefits of compounding
- Decide the asset allocation of your portfolio
Your asset allocation (investments across different asset classes such as equity, debt, etc.) is based on your risk profile. It is best to seek help from finance professionals such as financial advisors, mutual fund distributors, etc. to help you assess your risk profile and determine the asset allocation of your portfolio. The advisor should structure your asset allocation in a manner that can help you accumulate the required corpus for your retirement.
- Monitor your portfolio
Your portfolio needs to be reviewed at least annually to ensure that you are on track to achieve your retirement objective. Any changes in personal and financial circumstances need to be incorporated in your retirement plan.
Planning for retirement entails making a number of assumptions like your retirement age, life expectancy, future expenses and savings to determine a retirement corpus. Though it may seem complex, it can be simplified if you start early and seek professional help. Furthermore, it’s important to monitor and update your portfolio to accommodate changes. Start your retirement planning now.