With increased life expectancies, retirement planning has become more crucial. If one lives till 80, it means living 20 years without an income. Plus, there is the need to maintain a decent standard of living, even if one is not thinking of golf club memberships and foreign vacations. While retirement planning is an elaborate process, here are five things you need to know about retirement planning, especially if you are starting now.
Starting early is key: The younger the person when they start allocating funds towards a retirement investment, the higher the payout at the time of maturity. Or, if we look at it in another way, if you start late, you need to save a lot more every month to save the required corpus or, worse, not have enough money at retirement.
For example, let's say you are 25 years old and require a retirement corpus of Rs 5 crore at 60. At present, your retirement savings are nil, and you expect to get 12 per cent returns every year. So to build a corpus of Rs 5 crore, you need to invest about Rs 7,600 monthly. If other things remain the same and you are starting at 35, you would need to save about Rs 26,000 every month. If you start at 45, you need to save Rs 99,000 every month.
Inflation needs to be factored in: When it comes to financial planning, inflation is the biggest enemy, and it is no different when it comes to retirement planning. Expenses will rise every month not only till you retire but even after retirement. Let us say you are 30 years old, and your expenses are Rs 50,000 every month. If you consider a retirement age of 60 years and inflation of 6 per cent, you will require Rs 2.87 lakh in the first month after retirement. This amount will increase each month henceforth. Hence, when planning one's retirement, it is important to factor in inflation.
Important not to underestimate your retirement expenses: "Expenses during retirement do not go down a lot. Although some commuting cost and formal clothes, etc., may come down, other expenses might catch up," says Renu Maheswari, chief executive officer and principal advisor, Finzscholarz Wealth Manager, and a Sebi-registered investment advisor. For example, you may need more help at home and medicines. A lot of youngsters underestimate their expenses after retirement. You need money to be able to socialise with friends and family and to travel. 'Now you have more time to spend the money and pursue your hobbies. Make sure your estimates account for these," she adds.
You need to create a buffer: "The best of the planning can fail or may go wrong in the future. All planning tools are mathematical models based on assumptions. Keep an eye on these assumptions to create a foolproof plan," says Maheswari.
She adds that it is vital to make sure that beyond the basic calculations, you provide for at least 10 to 15 per cent of contingency funds. This is to enable survival even during the worst of conditions. Also, it is important not to underestimate your life expectancy. "As a matter of fact, the average age of human beings is on the rise. If your parents lived up to their 80s or late 80s, you could expect to live till the late 90s. Provide for those years. It is better to leave some estate behind rather than running out of money when you are old," she adds.
You need to build a medical corpus: Medical expenses increase as one grows older. While you may have insurance coverage, it may not be adequate. All illnesses may not require hospitalisation and may not be covered under insurance. Also, your insurance policy may have certain exclusions or clauses like co-payment, where you must pay a certain percentage of the bill from your pocket. We have already mentioned the importance of a buffer, but creating a separate corpus to meet medical expenses is also important.
Retirement years are rightfully called the golden years, where one may perhaps spend some of the best years of one's life. However, to plan properly for retirement, it is important to be prepared.
