5 Golden rules to a peaceful retirement   Jan 14, 2014

Today you all must undertake an exercise. Try to figure out the answer to this question – What would you like to do post retirement? Do you wish to travel and explore new places, take up that one hobby you have always wanted to pursue or become serious about fitness and improve your health? Well, retirement can give you plenty of time and opportunity to spend the golden years of life the way you want and with the same lifestyle that you enjoy today. But this dream can become a reality for only a few. We say ‘few’ because not many people realise the importance of retirement planning. You must understand that retirement planning is the only key to remain financially secured and maintain a comfortable standard of living even in the later years of life, where you may not draw regular flow of income. You see, planning for retirement can keep you financially independent even during your golden years, taking care of day-to-day expenses as well as any medical emergencies that may arise as one’s age progresses.

Here are a few golden rules that can give you peace of mind during your retirement years if implemented correctly:

  1. Determine the Retirement Corpus

    Unless you know where you are headed, it is very difficult to get there. In retirement planning as well, it is important to have a target in mind which you wish to achieve in order to live life comfortably in the second innings of your life. To arrive at some corpus amount, you might need to make certain estimations and assumptions. You have to first work out what age do you wish to retire at, what is your life expectancy (based on family history and health conditions), how much you spend every month, inflation that you expect on these expenses, pre and post retirement rate of return that you expect on investments, etc. Thereafter you can compute the corpus amount required for your retirement. You could take the help of online retirement calculators to arrive at this target figure.
  2. Start Early, and Retire Peacefully

    An often-heard excuse for putting off retirement planning is “I have enough time to go before I retire, so why rush?” Unfortunately, most of us fail to realise that procrastination is their biggest enemy when it comes to making retirement plans. In fact, starting early and ensuring that you have sufficient time on your side is the key to successful retirement planning. It is imperative for you to understand that being young provides you a benefit that is not available to all, 'time'. As it is said, "the early bird gets a bigger pie". Moreover, as you grow older, your risk taking capability decreases. Starting late is disadvantageous since it gives you lesser time to grow your retirement kitty. There is even a possibility that you may fall well short of your target.

    We will illustrate this with the help of an example:

    Mr. X decides that on retirement he will need a corpus of Rs. 25 lakhs (after taking into account his present income and expenses, the likely increase in both etc.). Assuming that his investments will earn a return of 12% p.a. how much does he needs to invest per month so as to achieve his retirement objective?

    Given here is a table showing 3 scenarios, in each scenario we have taken the tenure (time left) to the goal realisation to be different:
      Case I Case II Case III
    Target Amount (Rs.) 25,00,000 25,00,000 25,00,000
    Tenure (years) 30 20 10
    Returns (%) 12 12 12
    Annual Investment (Rs.) 9,249 30,979 1,27,197
    Monthly Investment (Rs.) 708 2,502 10,760

    In case I, the monthly investment amounts to approximately Rs. 708 to achieve Mr X’s target amount; however with passage of time, it grows exponentially. As a result if he starts investing for retirement as in case II, 20 years before the due date, Rs. 2,502 will be the monthly investment amount. Finally in case III, when he is just 10 years away from his retirement, the monthly investment required will be Rs. 10,760.

    Lesser the time at your disposal, the higher the amount has to be set aside for meeting your retirement needs. Not only can the same be hard on the wallet, for some it may not be a feasible option. As a result, the pre-determined investment objective might have to be toned down. Moral of the story – Not only does it pay to start early, delaying the same can cost you dear!
  3. Follow your Asset Allocation

    Exposure to different asset classes is imperative in building your retirement portfolio. The different asset classes (equity, debt, gold) have different attributes which help in maintaining the required balance in one’s retirement portfolio. By following your asset allocation we refer to investing into each asset class, based upon your risk appetite and the number of years left for goal realisation.

    For example, if you are going to retire in more than 10 years, then depending on your risk profile, your retirement funds can be channelized primarily into equity, with a 10% to 15% exposure to each debt and gold. If your retirement goal is more than 5 to 7 years away, you can have 45% to 60% exposure to equity, with upto 15% in gold and the rest in debt. However, if you are retiring in less than 3 years, it is advisable to redeem any equity investments and shift towards debt / fixed income instruments that are not impacted by market volatility.

    You must remember that merely following a suitable asset allocation alone will not help you reach your goals unless you invest in sound and appropriate investment venues.
  4. Choose suitable Insurance Policy

    Insurance is a must in retirement planning. As one grows old the number of physical ailments that one might suffer from also increases. Moreover, our life is quite unpredictable and uncertain. While you might believe that something will not ‘happen to you’ – that is often exactly what your neighbour is thinking. Hence it is extremely important for you to have a suitable and adequate health insurance policy or mediclaim. Apart from this, it is also wise to opt for a personal accident and critical illness policy from an early age. It is also advisable to maintain a medical contingency fund worth 5 – 10 lakhs (depending upon how much you can afford) and a general contingency reserve with 6 to 12 months of your expenses to compensate for unforeseen events. This will ensure that your retirement savings do not get eroded in case something unfortunate is to happen to you or any of your family members.
  5. Track and review your plan

    Your retirement plan needs to be monitored at regular intervals (atleast once a year) to make sure you are on target to meet your objectives. Any changes in the income, expenses, retirement age etc. needs to be incorporated in the plan. Also, make sure the plan meets your investment objectives in the changing market scenario.

If you follow the above mentioned rules in a systematic manner, planning for your retirement will not be a difficult task. However remember that in case you are unable to devote time or need help in constructing a suitable retirement plan, investing in the advice of an experienced investment consultant will not be a waste of money.

PersonalFN believes that while planning for your retirement you are planning the finances for the golden years of your life. It must be given due importance and dealt with utmost care. After all, you want to live for yourself and enjoy the fruits of your life-long efforts in the second innings of life.

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