Do you dream of spending your days after retirement idly lazing on the sofa with a good book or travelling the world to your heart’s desire? Most youngsters don’t see the need to plan so ahead in the future. However, experts say the earlier you start planning for your retirement in your professional career, the better. But it is rare that someone starts saving for retirement into their first job. Despite it, your dreams of life after retirement can turn into reality, only if you plan properly and execute with discipline and patience.
While a lot of people associate planning for retirement with just working professionals, the truth is that homemakers should also plan for their retirement. Their days are just as busy in making sure the household runs smoothly, so homemakers too have the right to take a break in their old age and spend some time relaxing, reading, and lazing around. Another good reason for homemakers to plan for retirement is that they save money, which essentially equals an income, and anyone with an income must save for a rainy day.
Apart from fulfilling dreams, saving for retirement proves to be very important for battling inflation. The cost of living, as we know, continues to rise as the purchasing power of money falls over time. Your expenses will increase a whole lot more by the time you retire.
Let's say your current annual expenditure is INR 1,00,000 and you have 30 years to go until retirement. How much will your annual expenditure have grown by, after taking inflation into consideration? Assuming a 5% inflation rate for 30 years, your expenditure will have soared to over INR 4,32,000 by the time you retire. Not to mention the fact that you would need this money each year after retirement. So, if you were planning to set aside only INR 1,00,000 a year for retirement, you would have saved for less than 25% of your actual requirement.
In short, planning for retirement is not a piece of cake, especially if you’ve never given it a serious thought. Unless your income rises at the same rate as inflation, your current standard of living will be that much more difficult to sustain 30 years down the line. How do you then effectively plan your retirement?
The good news is, there’s no reason to worry. Follow these seven expert rules for retirement planning and retire in comfort:
The first golden rule is to start early and set aside 10% of your salary for retirement planning in your savings account. Employed individuals are usually required to contribute 25% of their basic salary towards their Provident Fund (PF). For most people, the PF ends up as the default retirement plan. But more than how much you contribute each month, what is important is how consistently you contribute. A long-term savings plan is bound to pay off in the future through the power of compounding. If you are self-employed and do not have a PF provision, the 10% savings rule should be your Holy Grail. A good strategy would be to invest in mutual funds that suit your profile and risk appetite. You could start with an SIP and have the sum automatically debited from your account each month, ensuring a disciplined approach towards retirement planning. So, if you haven’t already, apply for a savings account.
Your portfolio's performance is dependent to a great degree on your asset allocation between stocks, fixed income, mutual funds, etc. Experts recommend an equity exposure of 100 minus your current age. So, at 30, your equity exposure should ideally be around 70% of your overall investment portfolio. Once you retire, your equity exposure should be no more than 25-30 % of your portfolio. Even within the asset class, the type of stocks (or equity funds) in your portfolio must vary with age.
Increase your retirement investment as your income grows. Not many people follow this rule even when there is a marked increase in their income, which can severely undermine retirement planning. When you increase your investment in tandem with your income, your corpus stands to increase significantly. The key is to commit to saving more in the future.
Often times, people tend to dig into their retirement savings for expenses such as children’s education, weddings, home renovations, etc. This undermines retirement planning to a great degree. A smart way to go about it is funding these expenses through using your savings account or personal loans that can later be repaid through EMIs. Loans are available for several expenses– education, vehicle, home, consumer durables, to name a few. However, there is no loan for retirement, so planning for it needs to begin early and smartly. Make a smart move by using personal loans EMI calculator to better manage your finances.
Determining post-retirement expenses is important for effective retirement planning. While some expenses may come down, others, such as medicine and insurance, go up. Therefore, it is imperative you have adequate health cover for yourself and your spouse. Unforeseen expenses and medical costs remain the biggest concerns for Indians after retirement. A smart solution is to buy a cover that goes on till you’re the age of 70-75. It is difficult to buy a fresh one when you are older and not-so-healthy.
It is tempting to use up your corpus before retirement, especially while switching jobs since it gives you an option of withdrawing your PF balance. Remember, if you keep using your PF corpus, your investment won't reap the rewards of compounding. When you switch jobs, make sure you fill Form 13 and transfer your PF balance to the new employer. More importantly, do a 'cost-benefit analysis' - If the INR 1,000 you spent on going out last week was instead invested in a mutual fund, it could have grown to nearly INR 20,000 (at 10% compounded growth) in 30 years!
It is important to regularly review your financial plan. Maybe, your investments are not growing the way you want to, or you need to save more money due to an increased standard of living. A periodic review will help you stay on track with your planning.
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