Planning for retirement is one of the most important financial goals for anyone. During your working years, you need to ensure that your lifestyle does not suffer during your retirement. Here are a few tips that you can use while planning for your retirement.
1. Set a CORRECT retirement corpus target. It is not easy to find out how much you need for retirement. Why? To begin with, you do not know how long you are going to live. Moreover, it is difficult to imagine how your expenses and inflation will shape up in 35-40 years. Yes, calculating an adequate retirement corpus is not easy. However, that does not mean you choose random numbers as your target. I have seen many setting a target of Rs 50 lacs / Rs 1 crore for their retirement corpus. If you are 30 and your annual expenses are Rs 3 lacs per annum, this expense will grow to Rs 17.2 lacs per annum at 6% inflation by the time you retire at the age of 60. You can see how a corpus of Rs 50 lacs or Rs 1 crore will be grossly inadequate. You will easily run out of funds within 6-8 years.
What do you do? There are many online retirement calculators available. You must calculate the target corpus with some reasonable assumptions. You may argue that, with so many assumptions, it is an exercise in futility. Not really. Though it is irrational to expect retirement calculators to be very accurate but most calculators do the basic things right such as consider longevity and inflation. You can try out a few calculators. Be conservative with assumptions. Calculate the average value. The output will be a good starting point. Believe me, your retirement corpus requirement will shock you. You can always review and revise your target as you move closer to retirement.
A target helps you maintain investment discipline. However, an ill-thought target will take you nowhere. You need to get your target right.
2. Start saving early. Now that you have your target corpus, you need to start investing too. Don’t wait till you turn 45 before you start planning for retirement. Start early and get the power of compounding behind you. Suppose you need to save Rs 3 crores for your retirement. If you start at the age of 30, you will need to invest Rs 13,161 per month at 10% p.a. If you start at the age of 40, you will need to invest Rs 39,179 per month. You wait for 10 years and you have to triple your investment. It may not even be possible for you to invest such high amount. Hence, start early. The earlier you start, the lesser you may need to invest per month.
3. Invest more when you can. It is good to put your long term investments in auto-pilot mode. However, you still need to review progress on a regular basis. Depending upon performance of your investments, you may even need to increase investments towards your retirement corpus. Early in your career, it may not even be possible for you to invest, say, Rs 15,000 per month. The reason could be a lower salary or other financial commitments such as home and education loans. Hence, you can start with small investments and increase it when your salary grows and cash flows improve. You can also use part of annual bonus to contribute to retirement corpus.
4. Take risk when you can. Your risk taking ability goes down when you are into your retirement. However, that does not mean your risk taking ability is low when you are planning for retirement. So, if you are 40 years old and saving for your retirement, you can afford to invest aggressively since your retirement is still many years away. Do not limit your investments to PPF, EPF, insurance plans and fixed deposits. Consider growth assets such as equity funds, which have potential to offer better long term returns.
When it comes to compounded returns, your investment horizon is only one part of the equation. The other two are investment amount and the rate of return. Do not settle for very low return. Do not go to the opposite extreme either. i.e., having your entire retirement portfolio in equity. During a bull run, you might begin to believe it is foolish in any other instrument other than equity. That’s not the case. Diversify your portfolio and get your asset allocation right. Start with an equity heavy portfolio. Increase allocation to debt as you move closer to retirement. You can have a bit of gold too.
5. Ignore Buy Vs Rent debate to an extent. Purchase a house before you retire. I have seen a lot of articles about Rent vs. Buy debate. I agree it makes for an excellent read. However, believe these proponents of renting at your own peril. Don’t be misled. In my opinion, you must purchase a house before you retire. I am not saying you must purchase a house before you make any investment. However, you must ensure you own a house before you retire. You don’t want to be at whims and fancies of owners and property brokers during your retirement. We all know property agents/brokers are not easy to deal with. No mathematical model can value such discomfort and harassment.
You can also consider purchasing house in the city where you may want to retire. So, you might be working in Mumbai but may want to retire in Pune. Purchase a house in Pune. It will be cheaper too. I am not saying that you must live in that house during retirement. You may still stay on rent. All I am saying is that you should have a roof that you can call your own and can fall back upon.
If you already own a house (self-purchase or inheritance from parents), then you can engage in such intellectual debates. If you don’t, be practical. Plan to purchase a house.
6. Earmark assets for retirement. PPF and EPF investments can be easily earmarked. With other investments such as fixed deposits and mutual funds, it may not be so easy. If you don’t do it, you may end up using retirement corpus for something else without even realising. For instance, you can invest for your retirement in a separate fund or folio.
7. Do not dip into retirement corpus at every opportunity. Let your kids share some responsibility. Taking the above point forward, since your retirement is many years away, you may find it convenient to utilise retirement fund for an immediate requirement, say purchase of a car, house, children’s education etc.
Withdrawing your EPF corpus (rather than transferring it) at switch of jobs is one such example. Unlike in the previous point where the withdrawal from retirement corpus was unintentional, in this case, it is deliberate. Resist the temptation. You have a choice. Compromise now and enjoy later. Or Enjoy now and Compromise later.
Everybody wants to do the best for the kids. After all, what do we earn for? And you should plan properly for their education. However, for various reasons, you may not be able to reach the corpus and fall short. What do you do? Do not rush to dip into your retirement savings. In my opinion, you should ask them to share the burden. For instance, you can ask them to take a loan for their education. This may not always be possible. In that case, you can dip into your corpus. Education is still acceptable. Withdrawing from your PPF to purchase a car or house for the kids is not acceptable.
8. Avoid bad products. Avoiding bad investments is as important as picking good investments. Stay away from quick rich schemes, stock tips etc. Additionally, don’t invest in traditional life insurance plans. I am talking about endowment and money back plans. Do remember all insurance companies (and not just LIC) sell these kind of plans. These plans provide guaranteed poor returns. In fact, do not mix investment and insurance at all. Purchase a pure term insurance plan and pick up mutual funds, PPF etc to meet your investment needs.
9. Do not fall for the nomenclature. Keep things simple. There are pension plans from insurance companies. There are retirement plans from mutual fund houses. And they have fancy names. Common keywords include bachat, varishtha, retirement, pension, suraksha etc. Look beyond the nomenclature.
Keep things simple. For instance, invest in PPF and EPF for your retirement debt portfolio. Invest in equity mutual funds for your equity portfolio. NPS (National Pension Scheme) can be a minor exception for investors in 30% tax bracket because of exclusive tax benefits under Section 80CCD(1B). In any case, do not invest more than Rs 50,000 per annum in NPS.
10. Purchase health insurance. A prolonged hospitalisation can hit your savings badly. In such cases, retirement portfolio is the one likely to be sacrificed first. It is important to safeguard your retirement portfolio against such financial shocks. Ensure adequate health insurance cover for your family.