Planning your retirement

Retirement is not something that just happens to other people – all of us will experience it at some point in time. However, not all of us can confidently say that we are well prepared for it. And, unless you work for the government, as a private sector employee you will have to support yourself during retirement because the government will not help you.

There is a high possibility that many of us might be under-funded to finance our own retirements. Even if you are young and retirement could be 30 years away for you, now is the best time to start thinking about your retirement.I hope that this article is very useful for those who are above 40 years.

What does retirement mean?

At a most basic level, retirement means that you will no longer be actively working or earning any salary income. As a result, you need to live off the savings that you would have made during the peak of your income earning years. During the peak of your economic life, you accumulate assets through your savings. During your retired years, you decumulate this pool of capital.

With improvements in the medical sciences, our generation is expected to live longer. If we assume that the average person retires around 55 - 60 years of age, they could still have another 20 – 25 years to live. This means that their savings have to last them for approximately 2 decades or more, when they do not have the capacity to work or are unemployable.

When is the best time to start planning for retirement?

Start early is the mantra that all financial advisors chant when it comes to retirement planning. The reason for this is that one ought to use one’s earning capacity today to accumulate savings that we can then consume during our retired years. If we don’t start early, funding one’s life for 20 – 25 years during one’s retired years can be very challenging. Our earnings capacity will deplete as we age. So, it’s best to take advantage of our earnings capacity today to protect our future when we are not actively earning.

Additionally, recognize that around the time that you plan to retire might also be the time that you have other additional needs to fund major goals such as paying for your child’s education abroad, or their marriage or taking care of your parents’ healthcare needs. So, be prepared to have enough capital to be able to simultaneously finance these different goals.

How can inflation ruin my retirement?

Inflation is like a silent tax that all of us pay. Rising prices raise the cost of living and over time reduce our standard living if our incomes do not rise commensurately. During retirement, as we have no salary income, all our passive sources of income such as retiral funds, investment or rental income, must earn us a higher rate of return than the long term rate of inflation.

Over a 20-year period during one’s retirement, the cost of living can easily double as a result of inflation. So, whenever we plan retirement, one must keep in mind having investments that can help offset the negative impact of inflation on one’s retirement savings.

What instruments should I invest in towards my retirement?

If you are young, the best instruments to invest in towards your retirement are one’s where you can expect long-term capital appreciation that will help offset the risk of inflation. You can afford to take more risk with your investments, because retirement is a long while away. If you are middle-aged and closer to retirement, you might want to reduce your exposure to risk and be invested in instruments that can earn you a more secure return because retirement is just around the corner.

The following are some instruments that are relevant for retirement planning:

- Retiral accounts at work – PF and EPF

- Equities – either through direct stock holdings or through mutual funds

- Pension plans – either pure pension plans or insurance cum pension plans

- Annuities – through which you invest today so that you can get a recurring payback after you enter retirement till the time of your death

- Investment property – that can earn you rent during your retired years

How should I think about healthcare needs during retirement?

Just like an aging car increasingly needs constant servicing and attention to protect against regular wear and tear, we will also need constant attention towards our health as we age. Look around, and you will see aging relatives who are getting health procedures done such as heart operations, joint replacements, removal of organs and so on. These are natural side effects of aging. However, the cost of healthcare is rising at a double-digit percentage, and chances are that by the time we enter retirement, common medical procedures might cost double of what they do today.

One must be prepared with enough funds to take care of one’s health during retirement. Additionally, one must ensure that one has a basic amount of health insurance coverage on an ongoing basis. Getting health insurance gets more expensive and tougher as one ages, especially after the age of 65.

How much money do I need to retire?

This is a very personal question and relates to the kind of lifestyle that you want to lead during your retired years. At a minimum, most people need 60% - 100% of their pre-retirement income each year to finance their retirement. For example, if at retirement you are spending say Rs 50,000 per month (or Rs 6 lakhs per year) towards your lifestyle, then you would need anywhere between Rs 30,000 to Rs 50,000 per month (60% - 100% of your pre-retirement income) during your retirement.

So, in the above example, assuming you retire at between age 55 – 60 years, you will need a lump sum that can create Rs 30,000 to Rs 50,000 of monthly income, keeping in mind that inflation will push this number higher every year, for the next 20 years or up to the time that you live. You must ensure that you do not outlive your savings, otherwise you will not have money to support your lifestyle and might have to rely on others to support your daily lifestyle.

If you want to retire early, say in your 40s, then recognize that you will need to ensure that your retirement savings last you that much longer as you are expected to live till 80.

Three point action plan to prepare for your retirement

1. Estimate your lifestyle costs: Ask yourself what kind of a lifestyle are you interested in during your retirement and how much you will need to support that keeping in mind that inflation will increase the cost of lifestyle between now and your retirement. Recognize that if you want to maintain something close to this, you will need adequate funds support this for at least 20 – 25 years during retirement.

2. Start saving now: Starting early is the best activity for your retirement planning because it allows you to benefit from compounding of capital. Even if you can put away small amounts of money, every little bit helps. As a matter of discipline, set aside 10% of your income towards your retirement if you are young, and up to 40% if you are middle-aged. You need to create a pool of capital that can get you a lump sum when you start your retirement that will constantly create income during your retired years.

3. Create passive sources of income: In retirement your earning capacity through active work goes down. So use your earnings today to create passive sources of income that can help you meet your income needs during retirement. For example, you can invest in property that can earn you rental income. Or, you can buy investment instruments that can give you dividends or interest income over time.

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If you fail to plan, then you are planning for failure.

So,better to plan for your retirement as given above and enjoy the last part

of your life happily and peacefully.