Are You Among Those Who Have Not Planned Their Retirement Yet? Read This
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Retirement planning is an important aspect of financial freedom that enables you to lead a stable, worry-free life in your golden years. But sadly this crucial step is often overlooked in the interest of short term goals like buying a car, planning a foreign vacation, etc.
Procrastination is the biggest hindrance to retirement planning as people often feel that there is enough time to plan and sort out the nitty-gritties of retirement in the later years of life. Therefore, though many people start investing, they often overlook setting a goal of how they will utilize the corpus. However, the future may hold financial obstacles and hence you should not wait till the late years to start planning.
A recent survey by PGIM India Mutual Fund revealed a similar observation. According to the survey, 51% of people have not started thinking or planning about retirement. Whereas, 49% people who have planned for retirement are unsure about the size of corpus they would need after retirement. The survey pointed out that people like to plan for travel, education, medical emergencies, while retirement is seen as an unhappy eventuality.
[Read: Has COVID-19 Derailed Your Retirement?]
Why plan for retirement?
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The average life expectancy is on the rise, meaning the need to save more and plan for the future
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It may not be possible to keep working forever
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A proper retirement plan means you will be financially independent and will not have to depend on anyone for your daily expenses, medical needs, etc.
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You will be free from the worry of earning a source of income and give ample time to pursue your interests and passions
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Getting a loan to fund your retirement is difficult
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Inflation erodes the value of your wealth which makes it important to have an efficient plan to deal with it
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Early retirement planning can help you build enough corpus to last your post retirement lifespan
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How to determine the retirement corpus?
Retirement corpus is the amount you will need after retirement to meet your expenses and continue with the same lifestyle and maybe pursue your other personal goals.
For this, you need to first ascertain your current annual expenses on various categories, such as household, medical, entertainment, travel, EMI, and children's school/tuition fees, and so on.
So, it is important that you make an accurate estimate of how much money you will require to maintain your present lifestyle after you retire.
Then factor in inflation to calculate how much your present expenses will amount to at the time of retirement. This is referred to as future value of money.
This is the amount you will need every year to meet your post-retirement expenses.
Your current age, number of years to retirement, life expectancy, and expected rate of return on your investment, play an important role in determining optimum retirement corpus and suitable investment avenue.
You can use PersonalFN's Retirement Calculator to calculate your retirement corpus
Remember, the earlier you start planning for retirement the bigger corpus you will be able to accumulate comfortably.
[Read: A Reliable Strategy to Ensure You Have Enough Money When You Retire]
Table 1: Benefits of starting retirement planning early
|
Mr A |
Mr B |
Mr C |
Mr D |
| Current Age |
30 |
35 |
40 |
45 |
| No of Years to Retirement |
30 |
25 |
20 |
15 |
| Expected Rate of Return (CAGR) |
12% |
12% |
12% |
12% |
| SIP Per Month |
-20000 |
-20000 |
-20000 |
-20000 |
| Total Investment |
7,200,000 |
6,000,000 |
4,800,000 |
3,600,000 |
| Retirement Corpus |
70,598,275 |
37,952,702 |
19,982,958 |
10,091,520 |
This table is indicative and for illustration purpose only.
Source: PersonalFN Research
Worthy investment avenues to plan your retirement
Indians' have always had an affinity towards Bank FDs, but this investment option will not generate a sufficient corpus to live a blissful retirement life. This is because the returns adjusted for inflation (known as real rate of returns) are not good enough, plus the interest earned on fixed income investment instruments is taxable.
Public Provident Fund and National Pension Schemes are good options for planning retirement since they offer you approximately 8% compounded annualised returns. That said, it won't be prudent to completely depend on this single instrument to plan for your golden years.
So what can you do?
You need to diversify your investment wisely across asset classes viz. equity, debt, and gold, based on your risk appetite and investment horizon. Mutual funds can help you diversify your portfolio across the said asset classes through its various categories and sub-categories.
Table 2: Asset allocation based on risk appetite and years to goal
| If your Risk profile is Low to Medium |
| Years to goals |
Equity |
Debt |
Gold |
| <=3years |
20% |
75% |
5% |
| 4 years |
30% |
65% |
5% |
| 5 years |
35% |
60% |
5% |
| 6-7 years |
50% |
45% |
5% |
| 8-10 years |
65% |
30% |
5% |
| >10 years |
75% |
20% |
5% |
|
| If your Risk profile is Medium to High |
| Years to goals |
Equity |
Debt |
Gold |
| <=3years |
30% |
65% |
5% |
| 4 years |
40% |
55% |
5% |
| 5 years |
45% |
50% |
5% |
| 6-7 years |
60% |
35% |
5% |
| 8-10 years |
75% |
20% |
5% |
| >10 years |
85% |
10% |
5% |
|
This table is indicative and for illustration purpose only.
Source: PersonalFN Research
There is a mutual fund for almost every need and risk appetite. It is very important to understand the risk-return potential of the mutual funds you choose for your retirement as well as post-retirement goals.
Do note that while different assets may react differently based on the market fluctuations, a proper allocation across asset class and investment style can protect you from the significant ups and downs of any single asset class and scheme in your portfolio.
Invest in worthy and suitable schemes to achieve your desired corpus.
But that's not all. You also need to keep track of how and when to rebalance your funds.
Remember that as your retirement goal time horizon changes, your asset allocation must change. In your investments need to be rebalanced to reflect the right asset allocation for the goal's reducing time horizon.
Lastly, ensure that you have optimal contingency fund and adequate insurance cover for life and health to deal with uncertain situations. Further, as far as possible avoid taking high-interest loan.
After you have engaged in holistic financial planning and made your investments, timely review your portfolio to ensure that you are on track to a blissful retirement. Incorporate any changes in your income, expenses, retirement age, etc. in your retirement plan.
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As a privileged subscriber of Retire Rich Report, you will get inside access to THREE strategies to build retirement wealth. You need to pick the one that suits your age and time horizon.
These strategies comprise of a ready set of equity, debt, and gold mutual funds, optimally allocated to build a decent corpus for one's dream retirement. Subscribe now!
Warm Regards,
Divya Grover
Research Analyst
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