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In your youth, retirement may seem a distant thing to worry about. Yet, if you want to lead a comfortable and dignified retired life, financial planning is necessary. No matter what your ideal retirement looks like, be it a relaxed time at home family and loved ones, or one of adventure and travel, it will need money.
Retirement planning means preparing for a steady stream of money after retirement. It entails setting aside funds and investing specifically with that goal in mind. Your retirement strategy will depend on your final goal, income, and your age.
Why do you need retirement planning?
Growing old can be expensive. Although frivolous expenses might reduce, medical bills are only likely to rise. Add to that the burden of inflation, and not having enough money to sustain future expenses can cause stress and worry. The purpose of having a retirement investment plan is to ensure financial stability in your later years without depending on others.
Here are four reasons why every individual must have a retirement fund:
1.Lack of a social retirement benefit
India has yet to implement a robust social security system with retirement benefits for its senior citizens. Although pensions and employee provident funds do exist, they may not be sufficient to cover all expenses. This is why creating a diversified retirement fund with fixed income and mutual fund investments becomes crucial.
2. Financial independence
For generations, older Indians have depended on their children for retirement support. Lately, youngsters are leading more independent lives.
Often, they are unable to support their parents financially. Even if they can do it, being responsible for yourself will give you more independence to live life on your own terms because you will not be answerable to anyone else.
The first step to plan your retirement is to picture it. Think about how you would want to spend your golden days and then estimate the money you would need to sustain. Don’t forget to account for inflation.
Next, estimate how much of it can be covered using your assets. This can help you arrive at the deficit amount you will need to plan and arrange for the future.
Analyze your present financial situation to gauge how much you can save. Ideally, about 30-50 per cent of your total savings should go towards retirement.
After this, you can narrow down on investment avenues. The younger you are, the more time you have to take advantage of compounding as well as take a few risks. Invest aggressively in mutual funds and even company stocks, if you can afford it. As you grow older, you may want to consider diversifying your investments to include lower-risk instruments like government-backed securities. Also, think about including annuities and insurance policies in your retirement plan.
The sooner, the better. Although youth in their 20s might not worry about retirement, starting early does give one more leeway. If you have missed that bus, you can start where you are.
A good retirement plan should be segregated into investment, accumulation, and withdrawal phases. Until your early 50s, you should focus on investing and building your corpus. As you near retirement, you should be able to shift the money to safer avenues so that you can depend on dipping into it after retirement.
Although many people do not consider insurance an essential part of retirement planning, it is a vital and indispensable component. Life insurance is a cover for a surviving spouse. If you are no longer around, your spouse may struggle financially on their own.
Planning for retirement must be a non-negotiable part of everyone’s financial strategy. The future may be uncertain, but it can help to be prepared. Diversify your retirement corpus by investing in mutual funds, fixed-income securities, and other government-backed securities. Start as soon as you can so that your later years are relaxed.
As you near your retirement, the horizon becomes clearer. You can see a sea change in your lifestyle on either side of the retirement day. By now, most of your big-ticket goals have been realised, save one - creating a nest egg and ensuring a secure and comfortable retirement. That’s why it’s important to build a retirement kitty of optimum size during your work life.
Unlike during the accumulation phase, where you would, perhaps, have invested in equities to save for your retirement, now you need to ensure safety of capital by moving out of volatile instruments, such as equity, into
lower-risk options. Derisk gradually - in all your stockmarket -linked investments, such as equity mutual funds, shift slowly from growth options to debt options. The quantum of money that you should move, however, will be determined not just by your risk orientation, but also by whether or not you plan a second career in retirement.
If you expect to keep earning when others have hung up their boots, you may risk a higher equity exposure than might be considered prudent for your age. But if you plan to live off your investments and savings, debt has to be the most important portion of your portfolio.
Initially, park your retirement corpus - such as gratuity, provident fund (PF) and the capital accumulated over the years from stocks and mutual funds - in short - term bank deposits. Take your time to meticulously chalk out and identify last-minute investment avenues. Apart from safety and liquidity, pay attention to tax issues to ensure that after retirement your tax liability is minimal.
First of all, create a contingency fund to cater to emergency expenses such as medical needs. Use short-term bank fixed deposits to this end. Thereafter, identify instruments that would help you prepare for a regular monthly income. Annuity plans from life insurers that provide pension during one’s lifetime and, thereafter, to one’s spouse, can cater to almost half of your needs. Further, a mix of bank fixed deposits, Senior Citizens Savings Scheme, post office Monthly Income Scheme and long-term bonds may supplement monthly requirements. If possible, keep 10-20 per cent of your money in equity or equity-linked funds to help retirement funds beat inflation - you may opt for monthly income plans of mutual funds having 15-30 per cent exposure in equities.
Alternatively, you can also park money in balanced funds with a maximum exposure of 65 per cent in equities. If you do not want to exit existing MF investments, you may opt for systematic withdrawal plans (SWPs) too. MIPs have a small exposure to equities and, depending on their performance, they offer dividends that help in meeting regular expenses. An SWP, on the other hand, fetches you regular income from a mutual fund as you keep withdrawing units from it.
It is important to take note of the life expectancy of women, which is usually higher than that for men. Therefore, provide for monthly expenses for your spouse for at least five more years than what you would for yourself. Keep provisions for long-term savings in longtenured fixed income securities, such as bonds with tenures of seven years or more, fixed deposits and National Savings Certificates (NSCs). Periodic maturities will create periodic flows.
People who have not been able to create a large enough retirement corpus feel perplexed when they hang up their boots. However, even those who have saved enough need to stick to a predetermined plan to ensure that their money outlasts them and they don’t go broke in retirement.
At this stage, you need to create a regular income stream. Choose from a host of financial products, such as annuities of life insurance companies and monthly income plans (MIPs) of mutual funds, and make provisions
for lump sum requirements, such as renovating the house and meeting uninsured medical emergencies. Last but not least, you also need to lay down a succession plan for your assets for their orderly distribution when you are no more.
You should focus on liquidity of your assets, management of taxes on your retirement funds, regular income and growth of your retirement kitty. Keeping your assets liquid might be a bit of a challenge as most fixed income instruments come with long lock-in periods of 3-10 years. Immediate annuities of life insurers come with the lifetime pension option. Use them to meet around half of your monthly household needs. Supplement this income by investing in Senior Citizens Saving Scheme, Post Office Monthly Income Scheme (POMIS), bank fixed deposits (FDs), bonds and other debt products. Ladder bank FDs for liquidity and interest rate advantage. Income could also come from dividends, MIPs and systematic withdrawal plans (SWPs) as well as rent from any property you might own. The key lies in creating a regular income stream.
Remain partly invested in equities after retirement to keep pace with inflation. To this end, invest in balanced or diversified equity funds having consistent track records.
As interest income from most fixed income instruments is taxable, it will add to your tax liability. Use tax-saving instruments to bring down your tax outgo—create a retirement portfolio accordingly. Hold on to investments in mutual funds and stocks, which you can liquidate when you want and where gains are not taxable over the long term. Use these investments to grow your retirement corpus. They will also ensure that your tax liability never becomes burdensome.
Your expenses will now be restricted mainly to your and your spouse’s living expenses, and expenses on healthcare, gifting and travelling. There could be additional expenses if your children are still dependent on you.
There is also a change in the nature of your expenses. For example, in your work life, you would have spent on commuting, formal attire and business lunches and dinners. All this stops after retirement. At the same time, healthcare expenses may go up.
Curb the tendency to splurge. Many people tend to spend excessively in their early retirement years. This is usually due to two reasons. First, at retirement, you receive benefits along with funds from insurance pension plans. This sudden deluge of funds tempts you to splurge. Second, you suddenly find a lot of free time in retirement. This encourages you to spend on either yourself or on your near and dear ones. This can have a very damaging effect on retirement funds - by thinning the base of money, it hits the compounding effect on your retirement funds.
After retirement, don't invest in corporate bonds unless the ratings are satisfactory and the issuer has an established track record. Avoid buying any life insurance product unless you still have financial liabilities. Stay away from unit-linked insurance plans (Ulips). Keep yourself and your spouse covered through health insurance plans, especially the ones that offer lifetime renewability. Finally, review your contingency fund at intervals. That's because you are now more prone to medical emergencies and you might need to augment it.
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