What is your idea of retirement?
Ideally retirement is all about getting to do things you have always wanted to. It could be going on a long holiday, pursuing a hobby/sport or just pampering your family with gifts.
The idea is to a live a comfortable life after 60 because at this age you neither have to report to work at 9 am or pay 50-60% of your salary towards housing and car loan.
You feel you have fulfilled all your responsibilities as a child, spouse and father. Hence this is your time to get more out of your life.
This only means your financial needs will not reduce even as you may not earn a pension post retirement. Even if you want to maintain the present standard of living, you have to start saving today for a comfortable tomorrow.
Need for Planning
This can be explained with a simple example. If you are spending Rs 30,000 for your monthly expenses, you will be spending around Rs 2.6 lakh per month assuming the inflation grows at 10%.
On one hand you will be spending more (in monetary terms) for your monthly expenses, on the other hand, you will not be earning a salary to foot these expenses. Many companies don’t even offer pension benefits post retirement. Hence the onus lies on you to build a retirement kitty to enjoy your golden years.
Start Early
The biggest challenge in retirement planning is to build a basket of investments that fights inflation, volatility and uncertainty. This can get tricky as the saving tenure for retirement planning is anywhere between 15 to 30 years depending on when you start saving.
Ideally an individual should start early to benefit from compounding effect. For example, if you save Rs 2000 per month for a period of 30 years, you will accumulate a corpus of over Rs 29 lakh at 8% yield. If the saving tenure reduced to 20 years, the size of the corpus will be Rs 11.78 lakhs and will further shrink to Rs 6.9 lakhs if the tenure is 15 years.
In case of compounding effect, the value multiplies because of the reinvestment of assets. At one stage, the returns are much higher more because of the reinvestment of the asset and not because of your monthly contribution.
Design a dynamic Plan
In early years, you also have the leeway to invest in high risk and high return products such as equity, which have the potential to beat inflation over a period of time. Asset classes such as Equity, Real Estate and Gold are known to offer good inflation adjusted returns.
The asset allocation is skewed towards equity in your 20s and early 30s because of higher risk appetite. At this stage you can buy stocks, mutual funds and derivatives and stay invested for the longest period of time. If you stay put for long term, temporary fluctuations in the equity market do not affect your portfolio, as it would see several such cycles over span of 15 years or more. As you grow older, less riskier instruments such as FDs, bonds, NCDs are added to your portfolio. Hence the investment mix of your portfolio has to change based on your age, goals and other financial responsibilities.
Reaping Rewards
A systematic draw down plan from your retirement kitty is as integral as your savings strategy. Giving the increase in longevity of life because of medical advancements, an individual is expected to live an average of 20-25 years of retired life. This means your retirement kitty has to be frugally utilised over a period of time.
Smart Tips:
1) Save 10% of your salary towards retirement kitty at least from the age of 30. Earlier the better.
2) Step up your contribution to retirement kitty. Allocate 40-50% of your annual hike towards savings.
3) Transfer your PF account if you switch jobs. Don’t dip into your PF kitty before retirement.
4) Like a systematic saving plan, have a systematic draw down plan from your retirement kitty
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