Introduction
Retirement is one of those inevitable phases of life, which marks the end of our careers that we have built over the years by acquiring skills and constant hard work. Assignments, deadlines, meetings, etc. soon get replaced by holidays, pursuing new hobbies, and spending more time with family. While some people look forward to this relaxed and stress-free life post-retirement, some get worried about the loss of a steady source of income.
If you do not prepare yourself financially, retirement can be quite depressing for you and your family. Retirement is a time when income drops and expenses rise. So, financial planning is required for leading a financially independent life even after retirement.
Financial planning simply refers to saving up money for the future. A number of people start saving for retirement without knowing how much they will need to maintain their required standard of living, after retirement.
So, if you have already started your retirement plan, ask yourself one simple question, “Am I saving enough for my retirement?”
In order to beat inflation, both savings and investments are very important
Inflation is the general increase in the price of goods and services. As years pass by, inflation eats away at the value of your money. In order to beat inflation, you need to not just save but invest as well.
What is Retirement Planning?
Retirement planning is a life-long process and although persons in their 20s, 30s, or even 40s, believe that retirement is a lifetime away and not necessarily something to begin planning for just yet. Truth is, retirement planning should start once we receive our first pay cheque or as early as age 25. This allows us to appreciate, from early, the value of saving and budgeting that is, planning for their personal and financial goals. Even though the Coronavirus has created a pandemic and people are adjusting to a “new normal” during this unprecedented time, planning for retirement should remain a top priority as a “must must” requirement.
Importance of Retirement Planning
The reality is that individuals are living longer and as such, it is important that we plan for those years in which one can no longer work. Here are six (6) important points to remember about retirement planning :
1-Ensures money is available upon retirement for everyday expenses for circumstances that may occur either health-wise or wealth-wise in the future.
2-Enables an individual has the ability to meet the needs of family members who may be dependent on them, even after retirement either for education, medical expenses and or other monthly expenses.
3-Supports the fulfillment of one’s dreams, wishes, and aspirations such as dream vacations, capital investment in business expansion or simply maintaining his or her current lifestyle.
4-Ensures financial independence. It helps lead a life with dignity & on one’s own terms.
5-With change in lifestyle, average life expectancy has increased and hence there is need of more funds for a comfortable& peaceful future.
6-Most importantly, people may not have the zeal to work for long and so retirement planning needs to be done at an early stage.
As you make your Retirement plans, keep these questions in mind:
At what age do you hope to retire?
What do you plan to do in retirement?
How many years do you think you’ll live after you retire?
What are your sources of retirement income?
How long do you have to save?
How are you going to account for risks, including inflation?
As you begin planning, you should set goals for retirement. Put them in writing and revisit them from time to time. Focus on what you can control and how much you need to save.
The planning strategies you implement depend on your career stage, your financial goals, when you would like to retire, and your current financial situation. If, for example, you are a late-career professional who hasn’t saved enough to fund your retirement, you must take into consideration factors such as time horizon and risk tolerance, both of which affect the types of investments that make sense for you.
Time Horizon is the period of time over which investment takes place. Short-term investments have time horizons of fewer than three years. If you plan on retiring in 20 years, your retirement planning would have a time horizon of 20 years.
Risk tolerance refers to the level of market risk you’re willing to take. For example, stocks carry higher risks than bonds do, but stocks have more growth potential.
Steps to Retirement Planning
1-Ascertain when you want to retire – Knowing how long you have before retirement will definitely have a big impact on how an individual invests. Whether an individual has 10, 20, or 30 years to plan, an individual will need to think about how to preserve his/her savings and pay monthly bills while outpacing inflation.
2-Calculate your mortgage, medicine (insurance), utilities, groceries expenses (M.U.G) – M.U.G. is an easy-to-remember term that is meant to represent the various essential monthly expenses people need to cover in retirement. Being aware of these costs helps an individual create a realistic budget especially during times of uncertainty.
3-Think about your monthly income – Knowing about ways to convert savings into actual income during retirement is essential. Retirees who receive a cheque every month for a set amount from a pension or annuity have shared that they maintain a happier lifestyle in comparison to those who did not have a pension or annuity. Including protected income from an annuity in your portfolio can give you a sense of ease knowing you’ll have money to cover those essential monthly expenses.
4-Learn about your healthcare options — Retirement age normally exposes individuals to a lot of non-communicable diseases such as stroke, cancer, heart disease just to name a few and as such, it is important for an individual to be aware of the healthcare options available to them either through the public or private system, how much it will cost and what these healthcare options will cover.
5-Plan for the good – With solid, realistic planning, you can start to think about all the things you want to do and how to get there. Will you actually be able to afford to live on a shikhara or see the Pyramids? The charity which you always wanted to do….Giving back to your alma mater or supporting a poor child through her education…..
6-Just start – Knowing retirement could last 20, 30, or more years, the best time to start planning is today. Begin thinking about all the ways you can maximize your savings and supplement retirement options with monthly streams of income. Considering an annuity can ensure a more solid monthly footing — and make your retirement years more blissful.
Which is a better option for Retirement Planning: Mutual Funds or Insurance?
Pension plans provide a guaranteed source of income in the form of annuity during retirement. However, they don’t provide immediate liquidity for emergencies and offer limited choice in terms of diversification and investment styles. The premium paid towards a pension plan is tax-deductible.
Mutual Funds investments are not tax-deductible unless you have invested in an ELSS fund but they offer you much more variety and flexibility in designing a retirement plan as per your need. If you are young, you can start SIPs in equity funds suiting your risk preference and continue the SIPs close to your retirement. You would have built a good corpus by then which can be transferred to short-term debt funds through STP(Systematic Transfer Plan) 2-3 yrs prior to retirement to reduce your risk.
If you didn’t plan well in advance for your retirement through SIP but are now thinking of it just before retirement, you can invest your lump sum savings and opt for SWP to withdraw a specified amount every month post-retirement.
Pension plans have a conservative allocation and offer stable returns while you need to choose a fund with suitable allocation in the case of mutual funds. Since annuity income is taxed as per your income slab while you pay only capital gains tax on mutual fund withdrawals, Mutual Funds can be more tax-efficient.
Retirement Planning using SIP Portfolio and a Trusted Advisor
Create a unique SIP Portfolio with life stage-based asset allocation to plan your retirement.
How does it work?
The money that you invest is divided into a predefined asset allocation in your chosen debt and equity scheme of any Mutual Fund Company. Asset Allocation can be determined by Your Trusted Financial Advisor.
As you grow older and your comfort with risk changes, your SIP plan gradually should shift your portfolio investments from high-risk instruments (equity) to relatively low-risk instruments (Debt) i.e reducing The SIP amount inequity and increasing the SIP amount in Debt.
This ensures that at the beginning of your retirement planning journey you can benefit from the growth potential of equities and as you get closer to retirement, you can protect your portfolio through debt investments.
Why is it good for you?
1-It invests your retirement money aligning to the required asset allocation at different ages.
2-SIP mode builds the discipline
3-It is a simple and easy way to create a nice nest egg for your retirement period
Let us do retirement planning, with this example & see how doable amounts in SIPs can address this goal comfortably.
| Current Age |
40 yrs |
| Expected Retirement Age |
60 yrs |
| Monthly Expenses For Current Lifestyle |
50,000 |
| Expected Inflation |
6% |
| Current Savings Per Month |
10,000 |
| Existing Corpus |
10,00,000 |
| Expected Pre Retirement Return |
12% |
| Expected Post Retirement Return |
7% |
| Life Expectancy |
80 yrs |
| Years To Retire |
20 yrs |
| Amount Required Per Month Post Retirement |
1,60,357 |
| Corpus Required @ Age of 60 yrs |
3,52,52,894 |
| Corpus U will Accumulate With Current Savings Per Month |
99,91,479 |
| Corpus You Will Accumulate With Existing Savings |
96,46,293 |
| Shortfall In Amount |
1,56,15,122 |
| Extra Savings Per Month Rqd To Achieve Your Retirement Corpus |
15,785 |
Whereby, if u are running an SIP of 5k per month & have another amount of 10 Lakhs invested in Mutual Funds ,all it would take for you to achieve the retirement corpus of 3.52 Cr is an SIP of 15,785 for 20 years.
