Planning for Retirement
Why do we need to be retirement ready
Retirement should be the best time of your life, when you can relax and enjoy your life by reaping the benefits of what you earn in so many years of hard work. The current life expectancy for women is age 70 and for men is age 67. Which means that we as women women will probably outlive their spouses and need to plan for retirement accordingly.
We are all usually prepared for the risk of loss of life with life insurance. However, living long can become a financial risk if we are not financially prepared for those years.
Fun(ny) fact! These days, we want to retire by age 50 or sooner. Which means, we usually start working by age 20-25, want to work till age 50 and live off those savings until the age of 70.
What is my risk in creating a retirement corpus?
The biggest risk is not investing and planning for retirement. The second biggest risk is getting stuck in the fixed returns mindset. We tend to get hung up on investments that give us fixed returns currently. Fixed returns may not match up to inflation, and the corpus we create might fall short.
So, what can you start doing for retirement?
It’s never too early (or late!) to plan for retirement. You can start by making savvy investment decisions during your working life and put your hard-earned money to work for you for the future.
What affects my money in retirement?
Loans
Aim to be liability free into retirement. You should settle any outstanding loans during your working years.
Term Insurance
Buy a pure term plan now to help you get adequate life cover in working years.
Health Insurance
With the rising cost of medical care, adequate health insurance has become essential. Have adequate life insurance in your working years only. More than 50 per cent of a person’s lifetime health care costs arise in the last year of her life, and more than 75 per cent in the last five years.
Quick Tip: Get a higher amount of health insurance when you are younger. Premiums rise over time based on age and health condition. Your health insurance should continue into retirement.
How do I calculate my retirement requirement?
Hypothetically, if you were to retire today, what amount do you think you would need on a monthly basis to lead a comfortable life? Do not assume any loans in this and any goals such as children’s education: you should create separate financial goals and savings plans for these.
What do I need to factor as growing expenses?
What compound interest gives, inflation takes away. You need to account for enough inflation to build a comfortable corpus.
Example: You are currently 28 years of age and want to retire at 55. You think that ₹50,000 in today’s terms will be good for you at age 55. The value of ₹50,000 per month now will be ₹2.55L when you turn 55 assuming a 6% annual inflation rate.
Now that you are aware of your monthly amount, this can be translated to an annual amount. If we were to assume that you are 28, will retire at age 55 and survive till age 80 (by the way, life expectancy goes up every decade). You will need ₹4 Crores for retirement.
Yes, that corpus amount may sound like a scary number, but the good news is that if you start planning, saving and investing early enough, you can make use of the benefits of compounding returns on your money.
When broken down, you need to save ₹16k per month from age 28 to 55 in an investment that is growing at 12% p.a.
Assess where you are currently
Put together your current investments and see how many of these will contribute towards your retirement. Your EPF, PPF, Insurance policies (if you have any) and any other investments that you might have. You can then identify the gap, and plan where to invest the balance.
Mutual funds to save for retirement day
Mutual funds, especially the equity based ones, are great to use to create your retirement corpus. When your retirement is more than 10 years away, you should consider including equity mutual funds in your portfolio.
