Retirement Planning

Retirement means different things to different people.  To some it might bring a blessed release after the hectic earning years.  A time for relaxation, peace, and a time of indulging in all the activities that got missed out before.

But for most, retirement conjures up a scary picture – a time of financial insecurity, of having to cut down on most things that one took for granted before, having the constant worry of compromising on the standard of living that one was used to before, and being financially dependent one’s children.

So which category would you like to see yourself in?

To make retirement a truly enjoyable time, one needs to plan ahead.  The most common mistake is either not planning for your retirement or leaving it to the last possible moment.

Ideally, this planning should be done on a priority basis.

How Much Income Will I Need?

The first step in retirement planning is to decide how much income you would be requiring at the time of retirement.  You will need to work out your expected expenses and also list out all the possible sources of income.  While doing so, you should be aware that some expenses will obviously not exist after you retire.  At the same time, some sources of income may dry up.  Housing EMIs, commuting expenses, shopping, etc., may reduce or stop altogether.  At the same time medical expenses or children’s marriages might turn out to be the big drainers on your capital.

After you finalize on the desired monthly income, adjustments for inflation will need to be factored in and then only you will land up with your actual requirement.

By rule of the thumb, around 80% of your final average income would be required per annum, post retirement.

What Kind Of Income Do I Need?

Second step is deciding how you would want the income.  Most people prefer a monthly income as opposed to a lump sum.  This will obviously depend on your needs.  In case of a child’s educational requirement or a child’s marriage, there could be a lump sum requirement.  For day to day needs though, a monthly income would be required.

For a monthly income, there could be an option of keeping the principal intact and living off the generated interest and dividends.  Obviously this is possible when the capital is large enough to accrue sufficient interest on it or your investment portfolio is such that it attracts high interest rates.

A second option would be having a monthly income consisting in part of the interest accrued on the deposits and in part of the capital itself.  This would result in a decreasing capital over a period of years and you need to figure in longevity and life expectancy, lest all your capital dries off, leaving you nothing in hand.

Your investment portfolio should balance out the risks and optimize the returns.  If you are not too financially savvy, do consult a certified financial planner.  He will judge your requirements and your risk-taking appetite and guide you appropriately.  Too many conservative investments may not give you enough returns, to beat inflation.  At the same time, too many aggressive and risky investments could result in very high returns but could result in a financial loss too.

When Should I Start Saving?

The most important question is  – when should you start saving for your retirement.  The answer is NOW.

Most people think retirement is something that will take care of itself.  Many equate pension fund and provident fund with retirement planning.  But they fail to realize that this is just a part of the bigger portfolio.  Just depending on provident funds and pension will not suffice.  The sooner you actively plan for your retirement and save up for it, the better the financial health you will have, after retirement.

How Much Do I Need To Save?

Usually financial planners apply the 20-20 rule and by this they mean 20% of your income should be saved, starting at least 20 years before you retire.

This obviously means that the earlier you start, the more you will have.  Likewise, the more you put aside, the higher the benefits.

You need to remember that some investment outcomes will be affected by the taxation imposed on it at the time of withdrawal or maturity.  Inflation will also play an important role as it will definitely eat away a major chunk of your profits.  Therefore any investments you do, should factor in these variables.

What If My Income Falls Short To Save Enough?

If this happens, it is time to reconsider your position.

One way is to take stock of how much income you are falling short of and try to supplement it with additional income either now or post retirement.

►   Take up an additional job or take up some part-time work, either now or post retirement.

►   Utilize your expertise and offer your knowledge as a consultant, either now or post retirement.

►   Turn your hobbies into an income-generating revenue.

►   Defer your retirement by a few years, if that is possible.

►   If you can take the risk, try increasing your returns by a small margin.  Even a small increase of 1-2% can make a significant impact overall.

►   Reconsider some of the expenses that you have lined up currently and post retirement.  This could include buying additional property, going abroad, making endowments, etc.  Be judicious and reassess your needs; cut down unwanted expenditure.

It is a wise decision to take the help of a Certified Financial Planner to help you negotiate the myriad investment options available.  He will customize a plan suitable for your needs, which will curtail your risks and help you to optimize your investments.