Retirement is the process in which a working professional after spending approximately three to four decades in the job market, decides to quit the workforce entirely. Generally, people after reaching the age of 60 or in the late 50s decide to retire. However, before retiring, people generally make sure that they have enough savings in their accounts. That’s because once retired, the regular stream of income into their account will be stopped. That’s why it is important to save money for a retirement fund. That’s where retirement planning comes in.
What is retirement planning?
Retirement planning is the process in which an investor takes plans out their expenses so that they have enough savings in their account in the future. By doing so, one ensures that after retirement, their expenses can be carried out smoothly. This process involves steps like setting retirement goals, ascertaining the amount of money that will be needed and investing to grow one’s retirement savings.
One thing to keep in mind about retirement plans is that they can be different from each other. After all, they are designed based on your specific ideas on how you want to spend your retired life. Therefore, it is important to have a financial plan that is designed specifically to suit your individual retirement needs.
What are some of the tips on how to plan for retirement?
By planning in advance, you can live your life after retirement without any financial dependence. Retirement planning is useful for purposes such as maintaining a standard of living after quitting the job market. All you need to do is follow these tips:
- Please start retirement planning early:
After entering the job market, young professionals enamoured with earning their own income, decide to splurge their earnings on themselves. Instead of that, if you are new to the job market, you could look at allocating a part of your earnings into investment plans. Doing so may help you to allocate enough wealth that may be helpful after retirement. While you may be wondering why at the age of 28 you need to worry about retirement, doing so will be helpful for the future. Investing early, say 30 years before retirement is helpful as your corpus grows by great lengths. The time period of 35 to 40 years is good enough to allow your money to grow by at least 4 or 5 times. For example, at the age of 25, you decide to invest an amount of Rs. 1,00,000 every year and the average return is 8.5%. After three or four decades, the amount is going to grow through compounding. Based on that, after 35 years, your money would become approximately ₹3.5 crores.
- You need to plan for more than you may need:
While being at the cusp of retirement or earlier, you must have a general idea of your income needs post-retirement. As a rule, it is better to be cautious and plan for more than what you may need. Therefore, it is important to start with an estimate of all the expenses. Generally, people feel that they may only need about 70% of their last drawn income. However, it is prudent to assume that they may need more.
- You may use the 4% rule:
The 4% rule states that one can comfortably withdraw 4% of their savings in the first year of retirement and adjust that amount for inflation for every subsequent year without risking running out of money for at least 30 years. The said rule was derived by financial planner William Bengen. According to him, a retiree who possesses an investment portfolio of 50% equity and 50% bonds should be able to outlive the funds if they draw down only 4% of the investment every year, adjusted for inflation. Effectively, this rule also means that the investments must be long term and last for 30 years. While the 4% rule is helpful as a guide but it is not necessarily perfect as it relies on past data and not on current market estimates or future risks.
- You may opt to invest in real estate:
One of the best ways to create a guaranteed income stream is to own property and lease it to earn a rental yield. If you own multiple assets, the rental income is higher. In fact, several seniors lease out their residences and move into a senior care community. Since rents increase every year, this form of income also helps stay ahead of inflation. Therefore, it is prudent to invest in property when we are younger and create a steady and guaranteed income stream. Additionally, you can also sell the real estate asset and create an extra corpus for investment.
- Consider investing in senior citizens saving scheme:
Numerous public sector banks like SBI have an investment scheme for senior citizens. This account is applicable for seniors above the age of 60 years, with an investment of up to Rs 15 lakh and offers an interest of 8.6%. This scheme qualifies for tax benefits under section 80C of The Indian Income Tax Act. Though the interest earned is taxable, the scheme offers one of the highest interest rates.
- Consider investing in mutual funds and pension funds:
It is also prudent to invest in schemes such as mutual and pension funds. Mutual fund investments have higher liquidity and allow the investor to earn a steady income. They also carry lesser risks than investing in the primary market and yet offer good returns on investment. Apart from mutual funds, investors should also consider investing in pension funds and saving schemes. This investment option comes with low risk and helps in preserving the investor’s capital, but they also offer much lower returns.
- You could opt for a monthly income scheme at the post office:
This is an investment scheme that offers features like a guaranteed return of 7.7% per annum, monthly fixed income, keeping the initial capital intact and even yields better results than other debt instruments. Plus, the scheme also serves as a source for a recurring deposit into which the income can be parked. This accelerates savings. The maturity period is 5 years. There is no TDS for this scheme, however, the interest earned is taxable. The scheme does not qualify for tax benefits under section 80C of The Indian Income Tax Act.
- You can opt to invest in a senior living community:
Everybody knows that the cost of living increases as one gets older and that’s applicable especially after retirement. So, for things like hiring caregivers, healthcare, physiotherapy, security and lifestyle services, you may have to pay more. Therefore, it is a smart choice to invest in a senior living community. In a senior living community, the community shares the resources and their costs. There, you get a chance to live a better lifestyle. They are known for offering healthcare facilities, quality housekeeping, curated wellness programs, sports and recreation facilities.
- Please make sure to rework your investment portfolio:
When you are a decade away from retirement, it is essential to pull out almost all your funds from equity and transfer them into debt. This move is recommended as it protects you from any short-term losses caused by equity. Ideally, only 10% of your funds should be in equity and the rest 90% in debt. Apart from that, regular monitoring of your investment plans is mandatory as you will know how they are performing. In case of losses, you can switch your funds from equity to debt or vice versa.
- Make sure that you have term insurance:
Life Insurance is vital for an individual and their family’s future. Death is an uncertain event, and one would never want their family to be caught in an unwanted financial crunch after their untimely death. That’s why it is necessary to opt for a term insurance plan at an early age like 25 or 30. Before buying, please ensure that you compare the products of all leading insurers and opt for the one that best suits your needs. The sum assured chosen should be at least 10 times your annual income so that your family is able to deal with rents, loans, and child expenses comfortably. If the annual income of the policyholder is 10 lakhs, then the sum assured must necessarily be 1 crore (10 times the annual income). A hefty sum assured would take care of all the family needs in case you are not around.
Retirement planning is an indispensable tool in these uncertain and inflation struck times. While your needs on getting old might not increase, they would definitely become a bit different. Medicines, hospital follow-ups, and the maintenance of a healthy lifestyle would become a routine. Moreover, an alternate source of income would become a necessity to work out all the changes mentioned above. That’s where retirement planning steps in.
Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.
