Retirement Planning, in a financial context, is the intelligent allocation of existing and future finances and cash flows, toward the exercise of building a corpus for your retired life.
This usually refers to setting aside funds from your regular cash inflows today (your salary or business income, rental inflows and other inflows you might have), investing them in the right asset allocation across equity, debt, gold and property, to build up a corpus that, when invested in a safe set of instruments, will give you steady cash inflows after you retire. These cash inflows have to sustain all your expenses, expected and unexpected, for the rest of your life, from your age of 60 (or whenever you retire) until a conservative life expectancy of 85 years. Your family health history will help you understand what a conservative life expectancy is in your case.
Everyone wants to retire rich. But the only ones that do are the ones that take the necessary steps to build up enough of a retirement corpus. And this doesn’t happen for everyone.
So how do you become one of the people that retires rich?
There are a few simple steps you need to take.
1. Understand the Value of this Life Goal
Often we speak to clients who don’t see the need to plan for their retirement, or believe that it is something that will take care of itself.
If you don’t plan for your retirement, and work towards building up the retirement corpus that you need, it is unlikely that you will achieve a worry-free retirement.
At PersonalFN we have seen enough clients come to us with low levels of awareness on the importance of this single goal, and we have seen their awareness grow as their Financial Plans progress.
Make no mistake - if you don’t give this goal the importance it deserves, your finances will most likely be difficult to manage after you retire.
2. Don’t Depend Only on Your Banker to Handle your Finances
Having a relationship manager at your bank who gives you advice on your investments is not the same as have a financial planner who will look at your entire financial situation and build you a financial plan. The two are very different.
Your banker will advise you on where to invest based on what you tell him.
But, your Planner will ask you for a lot of information, and your investment recommendations will be based on your Financial Plan which will be built from this information.
You will be asked to share your family details, your cash inflows, cash outflows, assets (and details therein), liabilities (and details therein), insurance policies, mutual funds, life goals - with their required corpus, time horizon and priority, and your risk appetite will be assessed.
A good Planner will make conservative assumptions - keeping expected rates of return low, and keeping expenses and inflation high. This will automatically build a cash buffer into your Plan.
3. Educate Yourself
The investors that make the most money from the markets, and face the least stress, are ones who educate themselves on the behavior of different asset classes. There are simple things you can start with, which will hold you in good stead with any investment you ever choose to make.
Know how asset classes function.
Equity will typically give you a rate of return that is equal to the GDP plus inflation.
So if the GDP is 6% and inflation is 7.50%, you can expect that equity over the long term will give you somewhere in the range of 12% to 15%.
This beats inflation, and helps you accumulate wealth.
Debt will not beat inflation. It will match inflation. So a Government bond will give you between 7% and 9% for a 1 year horizon. Why hold debt, then? Because it diversifies your portfolio, and is safe. Unless you invest in very risky, unsecured debt, say from a real estate developer, your capital is likely to be safe, and you will earn guaranteed, regular returns. This will help you plan your cash flows, especially if you are already retired and need clarity on your post retirement cash flow.
Gold serves as a hedge against inflation and protects you in times of global market volatility.
It is advisable to hold between 5% and 20% of your corpus in gold. If you remember the market crash of 2008, equity fell by 50% and gold went up correspondingly. It is still the global safe haven instrument and will continue to hold this status for the foreseeable future.
4. Plan Now and Start Your Investments Now
People put a lot of thought into their vacations. They decide on a destination, research ways to get there, figure out where they’re going to stay, how long they’ll stay, and how much expense they’re likely to incur.
If you put as much thought into your retirement, you’ll retire rich.
It’s best not to wait, because the more time you spend ‘in the market’, the more the power of compounding will work in your favour.
Rs. 100,000 invested today in an equity mutual fund yielding 15% per annum, will become Rs. 16.36 lakhs in 20 years.
If you delay 10 years, which leaves you only half the time period in the market, and invest double i.e. Rs. 200,000, in the same equity fund, for the remaining 10 years, your money will grow to become Rs. 8.09 lakhs. Less than half of your earlier potential corpus.
Don’t delay, get started immediately. all the richest investors today understand the value of the power of compounding and the danger of inflation, and are planning and investing accordingly.
You can be one of them.