Mark Twain – “The secret of getting ahead is getting started.”
For most of us, retirement is a goal which is last on our priority list. There are always some other near-term goals that take priority over this goal.
You have maybe been saving diligently for retirement. But in all likelihood, you have just a vague idea about what you want, not a concrete plan. That’s bad, for this means you will make several mistakes as you set out on the road to gifting yourself a comfortable life after retirement.
Most often, it is only in our 40’s that we realize the need to start planning for retirement. At that point of time we wonder: How much will I need during retirement? Have I saved enough, or will I have to compromise on our lifestyle? Do I need to postpone my retirement, or can I retire as desired? Of course, all of us want to maintain a good lifestyle even after retirement, but the question is, have we planned for it? And if not, how do we do it?
For example, consider a scenario where you need to accumulate a retirement corpus of Rs 5 crore by the age 60. If you start saving from the age of 40, you will need to invest Rs 50,000 per month in an investment that yields 12% p.a. to accumulate the corpus. On the other hand, if you had started saving from the age 30, you need an investment of only Rs 15,000 per month to accumulate the same corpus at age 60. This is the power of compounding.
Start to Plan
Here are the some important things you need to consider when you sit down to plan your finances:
- Try to get an estimate of your retirement budget – an estimate of your current expenditure as well as inflation in your retirement. This budget will help you decide how much funds you will actually need to post your retirement to manage yours and your family’s life smoothly. Inflation is the rate at which prices rise. It reduces purchasing power substantially. Assuming 7% inflation, Rs 1,00,000 today will be worth Rs 13,000 after 30 years. Don’t make the mistake of randomly assuming that expenses will fall as evidence shows that expenses after retirement are usually 80% of pre-retirement expenses
- Estimate the the time when you are planning or expecting to retire.
- Health care is an important part of the retirement plan. With the increasing age,the number of health problems also increases. As the expenses involved in health care also increases with time due to inflation, keeping an estimation of health care costs and planning retirement accordingly makes you financially prepared enough to tackle any such medical emergencies in future. It is good to buy an individual health policy early in life. It is not only cheaper but also helps you cover preexisting illnesses after completion of the waiting period. Moreover, it covers you even after you leave the job or your company curtails the benefits under the group plan to cut cost. It also earns tax benefits
- Once you calculate the estimates of health care and retirement budget, it is very important that you take a note of your expected income post retirement through various retirement plans, pension schemes etc. The gap between your expected retirement income and your budget will give you an idea about how much funds are still required in the given time.
- It is very important that you clear all your debts before retiring.
Keeping the long-term investments right is very important in wealth creation. Make sure you keep your investments sorted in the broader portfolio to be financially secured in future. This should include a healthy dose of equities especially if you have more than 5 years to retirement.
At the end of the planning exercise, your goal should be as clear as possible so it allows your financial advisor to work on a specific plan with you – something like “I want to retire on January 31, 2040 and want to have a monthly income of Rs 2 lakh in today’s terms”
Based on your age, risk profile, liquidity needs, existing assets etc. your advisor will recommend you the right investment options, that will help you achieve your retirement goal.
PLANNING FOR CONTINGENCIES
Your long-term investments are not for meeting contingencies. Hence, all people, irrespective of age and employment status, must build a contingency fund. A contingency fund should be able to meet at least six months’ expenses. In later years, it should take into account possible medical emergencies as well.
Avoid hitting the above-mentioned roadblocks for a smooth journey. Take our help. Contact our advisors by mailing us at customerconnect@plindia.com