Retirement

You are young now, physically and mentally fit enough to earn your livelihood, but you can’t avoid getting older year by year. One day may be voluntarily or forced by life you must have to retire and is an important reality for everyone. Most young people think retirement is a long way off. However, it is important to plan for your life post-retirement if you wish to retain your financial independence and maintain a comfortable standard of living when you are no longer earning.

For most people who had planned ahead in their life, retirement is the best time of their life, when they can relax and enjoy life by reaping benefits of what they earn in so many years of hard work. To achieve a worry-free retired life, here’s why you should plan ahead.

# Medical emergencies: With increasing age comes more health problems. Medical expenses which may make a huge dent in your income post retirement. Failure here could lead you to liquidate (sell) your assets in order to meet such expenses. Remember medical claims do not always suffice.

# Inflation: As you need to worry about it you need to account for it as well. You need to take into account inflation while calculating your retirement funds as well as your expenses.

# No state sponsored pension plan: Unlike the US and UK where they have state pensions or social security benefits during retirement, India does not provide such benefits. So, you are really on your own.

# Fragmentation of nuclear families: Gone are the days when the elderly had a family to give them support. The culture of the Indian family is changing as couples are preferring to live independently near to their workplace. It’s vital to plan your retirement without any help from your family.

Now is the time when you need to make savvy investment decisions during your working life and put your hard-earned money to work for you in future.

Golden rules of retirement:

Experts contend that retirement planning should start from the day you start earning. Sound advice indeed, but one that is seldom followed. Below are the golden rules of retirement planning that have been advocated by experts for decades. Follow them and you can be sure to retire in comfort.

# Save at least 10% of your income for retirement: It is very crucial for self-employed professionals and others who are not covered by any compulsory retirement plan such as the EPF. They have to save every month on their own and can make it through different products such as PPF, FD, Mutual Funds, and Equity and so on by choosing the ones that suit their risk appetite and age profile. However, you need to have the discipline to put away the given sum on a regular basis. Whenever you get a raise, allocate 15-20% of the additional income to savings. You won’t even notice the outgo.

# Never use corpus before you retire: A lot more occasion like buying a car, a house, or in medical emergencies, your child’s professional study or marriage makes a stress in your financial health and forces you to use your retirement savings. Dipping into the corpus before you retire prevents your money to gain from the power of compounding. For the other expected financial expenses you should be plan your finance well ahead to avoid using your retirement funds. Don’t dip into your PF for your child’s education. Take a loan instead. It helps inculcate the saving habit in the child. The sudden flush of liquidity can trigger a spending spree and ill-planned decisions that can cripple your financial planning. Often, the money goes into discretionary spending, which means your retirement planning is back at square one. A late start means a smaller corpus even if you start investing more.

# Save minimum 20 times your annual expenses: This rule is different from others because it is based on how much you spend, not on how much your investments earn. Knowing your post-retirement expenses is crucial to retirement planning. Some expenses, such as those on clothing and entertainment, come down. Others, such as transportation, medicine and insurance, go up. Add up all the expenses you are likely to incur after retirement to know how much you will need per month. Then, multiply this amount by 240 to know how much should be your retirement corpus.

However, this calculation is based on a number of assumptions. Firstly, you should not have outstanding loans when you hang up your boots. Secondly, you and your spouse should have sufficient health insurance.

# Invest in diversified asset classes: An investment portfolio’s performance is determined more by its asset allocation than by the returns from individual investments or market timing. How much you have when you attend your last day at work will depend on how you divided your retirement savings between stocks, fixed income and other asset classes. Experts recommend that you should have an equity exposure of 100 minus your age. So, at 30, you should have about 70% of your portfolio in equities. At 55, the exposure to this volatile asset class should have been pared down to 45%. After you retire, your exposure to stocks should not be more than 25-30 % of your portfolio.

Even within equities, the type of stocks (or equity funds) in your portfolio should vary with age.

This is not a hard and fast rule and should also take into account the financial situation of the individual. It assumes that all people at a certain age will have the same risk appetite. This is not true. A 45-year-old person with a good income and few dependants will be able to take on more risk than someone who is 30 but has a low and unsteady income.

# Withdraw 5% a year initially, then step up: One of the biggest challenges for tomorrow’s retirees is to ensure that they don’t outlive their savings. This is a distinct possibility because of two major factors: rising cost of living and an increase in life expectancy. High inflation, in fact, is enemy no. 1 for the retired investor. Sure, the inflation rate will not remain as high as it is right now. However, over 20 years, even a nominal inflation of 6% will reduce the value of 1 crore to 29 lakh. Besides, Indians are living longer. Life expectancy rose from 61.3 years in 2000 to 66.46 years in 2010. By 2020, the average Indian can expect to live till 72 years. In urban areas, where people have better access to healthcare, and in higher income groups, the life expectancy could extend beyond 80 years.

To ensure that you don’t run out of money in your old age, you must have a drawdown plan in place. The thumb rule is not to withdraw more than 5% of the corpus in the first five years of retirement. This can be progressively increased to 10% by the time the retiree is 70. This essentially means that the retiree should draw down less than the appreciation in the initial decade, but in the next 10 years, he can withdraw more than the accretion to the corpus. At 80, even a 20% annual drawdown rate would be considered safe.

The problem arises because most Indians are not comfortable with the idea of drawing down from their corpus. There is an overarching desire to leave something behind for their heirs and dependents. Given the inability of a corpus to beat inflation in the long run, the retirees should be prepared for a depletion of their corpus.

What products should be in your portfolio?

The primary goal of a well-planned retirement investment would be to live off the asset and not on the asset. So you need to careful choosing the right assets that help and grow in long term for a better retired life.

It’s more important to have a diversified asset to ensure risk from over exposure to one asset class and forms a critical part of the retirement investment strategy and by balancing investments over time across multiple asset classes, investors can ensure accumulation of sufficient retirement corpus.

The primary aspect of retirement planning is to think long-term and to start immediately. Once this is done, one can start looking at products and solutions that will help in building a secure retirement corpus.

Here are a few retirement planning products that one should opt for:

  • Equities: Equities offer great growth potential for a disciplined investor. If the investment in equity asset can done right it can generate tremendous value in the long term, as opposed to the popular misconception that equity investment is risky. There are multiple options available for investors to invest in equities like investing share market, investing in Mutual Funds and ETFs. In addition, employees can purchase shares by participating in ESOPs and IPOs offered by their employer. Investment in mutual fund can be done in a lump sum or in a staggered manner via SIPs.  Mutual funds investment through monthly SIP helps you to invest in a disciplined manner for your retirement. Equity investment has the potential to beat inflation and deliver superior risk and tax-adjusted returns in long term.

 

  • Fixed Income: Like equities, Fixed Income are popular and hugely accepted. It comes with a variety of options. One can opt from a combination of PPF, FD, Tax-free Bonds, Company Deposits and Government securities depending on the choice. The hallmark of this asset class is stability and some of these are backed by the government. Fixed Deposits can provide instant liquidity at any time. One must park a small amount in FDs in the retirement portfolio to meet such emergencies.

 

  • Insurance: Buy an insurance plan that invests your money specifically to provide for your retirement. Or invest in a health insurance or term insurance plan as it protect you from using up or spending your savings, not to earn a return on it. Reasons one should consider investing in insurance early. Firstly, as one grows older insurance becomes more expensive. So it’s important to invest early to avail the best price. Secondly, health issues might arise without a warning. A health insurance will cover your costs during medical emergencies.

 

  • Invest in NPS: New Pension Scheme or NPS is a long-term investment product, it helps in creating a habit of doing long-term savings for retirement. It allows you to invest in a mix of stocks, bonds, government securities and alternate assets. Another advantage of NPS, which also allows you to invest in equity, also provides tax benefit in the form of deduction under section 80C. While doing regular savings every year during the accumulation phase, post-retirement, you get a good regular income which can act as a pension income for yourself.

 

  • Own a Home: Investing in real estate and getting a house for yourself on time is a good investment to secure your retirement. It’s important that during the retirement years you wouldn’t be paying rent or EMIs. Owning a house that’s free of inconveniencies and debt provides a sense of permanence and stability during the retirement years.