All You Need To Know About
Retirement Planning

Retirement is certain, and you continue to live even after retirement. Hence, the expenses will exist even at such times. Both the expected and unexpected expenses will occur.

Expected expenses include household expenses, discretionary expenses, children’s school and college fees, EMI payments, saving and investing for your retirement and so on.

The unexpected expenses include medical contingency, creating a safety fund to compensate for loss of a job, and so on.

Hence, you need a retirement plan to meet these expenses.

Retirement gives an opportunity to spend the golden years of life the way you want and with the same or better lifestyle that you enjoy today.

This can keep you financially independent to take care of the day-to-day expenses as well as any medical emergencies that may arise as your age progresses. 

Hence, engaging in prudent retirement planning is the key to remain financially secured.

And for this it is important to analyse your current financial health. Your financial health in present terms will aid you and your financial planner to derive a course of action to achieve a sustainable retired life plan.

Thus, when dealing with your personal finances, it is important to start by knowing how financially healthy you are today.

Your financial health can be measured on the basis of the income you earn and obligations you bear.

These 3 simple personal finance rules that you can start with are here, to see where you stand today.

1. Debt to Income Ratio

   Ideally, your debt to income ratio should not be higher than 30%. Because then it would mean you are spending more than 30% of your income on paying loans / interest on loans.

2. Savings to Income Ratio

   Ideally, you should be saving at least 20% of your monthly income to save and invest.

3. Contingency Reserve

   You should set aside 6 to 24 months of living expenses as a contingency fund to be used only in times of emergencies.

Remember - it is better to first invest, and then spend out of what is left, rather than to first spend, and then invest out of what is left.

Maintain your budget. Your budget will help you monitor and track your money flow on a month on month basis. You will be able to see how much of your money is spent on necessities, and how much on luxuries.

By the end of one month, you will have greater awareness on where your money is going, and you will be able to streamline your expenses to increase your investments, ultimately building more wealth.

With a structured plan, you are equipped to handle various factors such as surpluses, shortfalls and emergencies. You understand how quickly or how likely are you to achieve your retirement goals. Additionally, you gain control on your cash flows, your earnings and expenses, and what level of risk you need to be take to achieve all your goals.

In short, a retirement plan will let you to develop a comprehensive understanding of your life goals (the ENDS) as also define the path (the MEANS) to achieve the same.

Why do you need to plan your finances for retirement?

It is easy to cover your expenses as long as you are earning your monthly salary. But post retirement you need to have enough money set aside to live the rest of your life maintaining a good lifestyle.

1. To cover daily living expenses

   All of us have to bear the necessary living expenses even after retirement. Because life moves on and the absence of our monthly income could become a night mare.

   Retirement planning is working towards avoiding this night mare from becoming a reality. Not many people get pensions or gratuities post retirement and even for those who do receive them; the amount is generally not big enough to cover all of their expenses.

   By planning and building a sizeable retirement corpus, you can ensure that your family’s standard of living is not compromised post retirement.

2. To cover medical expenses

   As one’s age progresses, the number of health issues and emergencies also increase. And as you might be aware, medical expenses bear the potential to create a huge hole in your pocket. In fact, these days even dental treatments can cost you a small fortune.

   Mediclaim or health insurance policies sometimes may not cover all your medical expenses.

   Therefore, your retirement corpus must be large enough to cover your and your family’s medical expenditure to avoid a financial crunch in the later years of life.

3. To fight inflation

   Inflation refers to the rise in the prices of goods and services.It has the power to kill the value of your money.

   And as some of you may be aware, it eats into our savings and reduces the purchasing power of our hard-earned money. You see, there has been constant rise in price of goods and services and it will continue to be on a rise until you reach the retirement age.

   This means that you would have to pay more for everything in the future. From grocery to travel to accommodation, it is all going to cost you relatively more in the future.

   Without a sound retirement plan, that aims at establishing an adequate retirement corpus keeping in mind inflation, life expectancy, rate of return and so on, it would be impossible for you to achieve all your retirement goals.

4. To deal with uncertainties

   Life is quite unpredictable and uncertain. It can sometimes throw us in adverse situations and circumstances which we may not have expected. Some situations have the power to create a financial as well as emotional turmoil in your life such as natural calamities, loss of loved ones, financial difficulties in the life of family members and so on.

   Having a sufficient corpus to take care of such contingent events can always come to your rescue. Thus, while you approach retirement, it is imperative that you have a sufficient contingency fund, so that the intermediate period of turbulence and turmoil can be managed better and not hinder your long-term goal of retirement.

5. To meet your retirement goals

   Retirement goals are the objectives that you wish to achieve in your retirement years. These could be travelling and exploring new places or taking up hobbies that you have always wanted to pursue.

   However, if you do not plan and save for all these retirement goals in your working life, they cannot become a reality in your post retirement years.

   Hence, it is absolutely essential to have a strong Retirement Plan that will give you awareness on where you stand today, and what steps you need to take to achieve this goal.

If you didn't make a single retirement planning mistake, if every time you invested, it was according to plan, in the right asset class, in the right instrument, in the right option and at the right time? Wouldn't life be grand?

So, it is imperative that you plan for your retirement wisely. Here are the steps on how you should go about planning for your retirement by:

Step #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 to live comfortably in the second innings of your life.

To arrive at some corpus amount, you might need to make certain estimations and assumptions.

You must first work out your retirement age, life expectancy (based on family history and health conditions), monthly expenses, expected rate of inflation, 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 can also take the help of PersonalFN’s Retirement Planning Calculator to arrive at this target figure.

Step #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.

But if he starts investing for retirement as in case II, 20 years before the due date then, his monthly investment amount would be around Rs. 2,502.

Finally, in case III, when he is just 10 years away from his retirement, the monthly investment required will be Rs. 10,760.

Hence, 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, it may not be a feasible option too. 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!

Step #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.

And 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.

Step #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. 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.

Step #5: Track and review your plan

Your retirement plan needs to be monitored at regular intervals (at least 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.

But what is the best time to start planning for retirement?

Read on we have an answer for this question too…

At a young age

If you start investing early in life you will be able to accumulate the necessary corpus required for your retirement through the power of compounding as seen in one of example which we earlier cited.

You see, when you enter this stage, first determine the corpus you would require post retirement and then calculate the amount you should be saving each month to accumulate that desired corpus.

Once you have determined the amount to be saved per month, it is vital that you also develop a plan to allocate and invest your savings.

Being a young investor, you can allocate a large percentage of your portfolio in risky asset classes, such as equities and real estate. This is because; you have ample amount of time and opportunities to recover from any possible setbacks in the value of the portfolio.

Hence, investing in equity mutual funds via SIP (Systematic Investment Plan) mode works the best. You can start with amount as low as Rs 500 and gradually increase your investments with growth in salary.

But remember to invest prudently in risky assets, as this would lessen probability of loss to capital and instead earn high returns for your retirement portfolio.

Many young investors park their entire savings in safe instruments such as Government securities, fixed deposits etc., but they fail to recognise that investing in such conservative instruments will provide you conservative returns as well, which might not help in building the desired corpus in time and hedge inflation.

Read more on: All You Need To Know About SIPs

Middle Age

In your 30s or 40s you are mostly climbing the corporate ladder and earning a higher income. But, you also have added responsibilities such as home / car loan, raising your children and saving for their future, taking care of your parents in their old-age and so on.

When you are in this phase, it is important for you to have a clear picture of your financial goals. However, retirement planning should not take a back seat in lieu of meeting other goals. It is imperative to remain focused and maintain consistency in saving for your retirement. In fact, with an increment in salary or profits, you must also increase the amount of contribution you make to the retirement kitty.

Never withdraw from this account for meeting other costs such as holiday expenses or children's college education. You see, planning and saving separately for other expenses including insurance premiums or medical emergencies such as accidents or illness, will largely help you in creating and retaining the desired retirement corpus.

If you have already reached this stage and have not yet started planning or saving for your retirement, then it is high time you began. Considering the fact, that you still have many working years left until retirement your asset allocation pattern will not change much from the previous stage.

You can also consider investing in tax deferred instruments which will attract lower taxes when redeemed post retirement.

Nearing Retirement

When you are in the 50s age group, you have reached the pinnacle of your earning potential. By this time, most of your major outlays in life such as home loans or children's college education are already behind you. Hence you can increase the contributions towards your retirement goal to a great extent and also save a large portion of your monthly earnings. Use this as an opportunity to give a last booster for enhancing the retirement corpus.

However, when you enter this life stage, asset allocation is something that you need to be overly cautious about. This is because you have fewer number of working years are left to cover up any monetary setbacks that your retirement portfolio might suffer. Hence although a small portion of your portfolio can be exposed to risky asset classes, the remaining must be shifted to relatively less volatile asset classes such debt and gold.

Already Retired

If you have crossed the benchmark age of 60 years, then most of you have already retired or may be considering retirement soon (after some extended years of work life). And here it must be

borne in mind that although you have retired or retiring very soon, the retirement planning process has not ended. You need to calculate the amount you will withdraw per month based on the corpus you have accumulated and your present health conditions. Some of us might also consider working part time post retirement or doing some small business of our own. You must review your investment accounts periodically and ensure those inflows, if any, are prudently parked. You should keep at least 6 months - 1 year of expenses in your bank account or in a liquid fund to meet day-to-day expenses. Moreover, most of your portfolio should be invested in safe asset classes to protect it from market volatility. You don't want to see the savings of your lifetime to get eroded and depleted due to turbulent market conditions.

Most individuals who are in 20s and have recently started earning might think that retirement is a distant reality. For them, planning for retirement at this early age may seem like being overly cautious.

Mind you, investing early in life will enable you to accumulate the necessary corpus required for your retirement through the power of compounding as seen in one of example which we cited earlier.

With age being on your side and chances to climb up the ladder in your career are high, you could initially tilt your investment portfolio more towards risky asset classes which could multiply wealth better for you. So, you must start investing at an early age.

Once you have determined the amount to be saved per month, it is vital that you also develop a plan to allocate and invest your savings. Being a young investor, you can allocate a large percentage of your portfolio in risky asset classes, such as equities and real estate.

This is because; you have ample amount of time and opportunities to recover from any possible setbacks in the value of the portfolio. But remember to invest prudently in risky assets, as this would lessen probability of loss to capital and instead earn high returns for your retirement portfolio.

Many young investors park their entire savings in safe instruments such as Government securities, fixed deposits etc., but they fail to recognise that investing in such conservative instruments will provide you conservative returns as well, which might not help in building the desired corpus in time and hedge inflation.

Hence, start early and invest adequately in correct assets. Make sure that this asset allocation fits well within your risk profile. If your risk-appetite permits do not hesitate taking risk.

Alternatively, you can check PersonalFN’s The Retirement Letter and we will be more than happy to be a part of your Retirement Planning.

Equity

Equity as an asset class has the ability to beat inflation and provide alpha returns over longer time horizon. By nature, equities are volatile and risky investments. However, if one lacks the expertise and skills of analysing and selecting the right stocks, then he can adopt the indirect route of investments to equities i.e. equity mutual funds. By taking exposure in equities through equity mutual funds, the risk and volatility of this asset class is reduced to a considerable extent. Again, over here you need to select the right mutual funds to benefit in the long run. You should look at not only the quantitative parameters but also qualitative parameters like the fund management style, whether the fund house is driven by strong investment systems and processes etc.

Based on your risk appetite, exposure to mid-cap funds, large cap funds can be derived at. Thus, a prudent approach followed in selecting the right mutual funds for your retirement portfolio may work wonders in generating stellar returns.

Generally, your exposure to equity mutual funds should be more of large cap funds as they are able to provide stability to the portfolio during economic turmoil. However, exposure to well proven mid cap funds from the stable of fund houses following prudent investment systems and processes may be considered to give that extra push to returns generating ability of the portfolio.

Debt

Debt as an asset class is known for its ability to provide stability to one’s portfolio and also emphasise on generating regular income stream (which is extremely important during your retired life). Again, over here the category of debt oriented mutual funds can be of immense help to provide stability or to generate regular income as required in one’s portfolio.

As you near your retirement age, make sure your exposure to debt oriented mutual funds is increased so as to protect the corpus built up over the years and reducing the risk of the overall portfolio. There are various categories of debt oriented mutual funds like liquid funds, liquid plus funds, income funds, floating rate funds, gilt funds etc. which you can pick and choose for investment based on your investment time horizon.

Generally, when you are nearing your retirement, you should transfer your corpus to a debt oriented mutual fund from a fund house having a proven track record of strong investment systems and processes. However, please keep in mind that taking into consideration the prevailing market conditions at that time you may have to shift your corpus to any of the debt mutual fund categories as mentioned above.

For instance, if the then interest rates are at elevated levels and close to peeking out, you may take exposure to short term income funds or pure long term income funds as longer tenor bond papers look attractive. Longer duration funds (preferably through dynamic bond / flexi-debt funds) can be considered, if one has a longer investment horizon (of say 2 to 3 years).

But if you have a short-term time horizon (of less than 3 months) and need to keep the principal intact, then you would be better-off investing in liquid funds. Liquid plus funds (Ultra Short-Term Bond Funds) can be considered if you have a 3 to 6 months horizon. However, if you have a medium-term investment horizon (of over 6 months) you may allocate your investments to floating rate funds.

You may also like to read: Bank FD Vs. Mutual Funds: Which Is Better?

Use PersonalFN’s Mutual Fund Calculator to understand the

Gold

Gold has been historically considered as an important asset class mainly for three reasons:

• Hedge against inflation

• Adds stability to the investment portfolio

• Asset Allocation avenue

And as an asset class, gold over years has shown a secular uptrend. In 1971, the price of gold was about U.S. dollar 32 an ounce and currently (i.e. on January 29, 2018) it is around U.S. dollar 1,393 an ounce –which indicates that price of gold has gone up by 40 times over the last 43 years.

Moreover, even the central banks across the globe take refuge in this classic asset class (considered as a safe haven) to ward off the ill effects of an economic turmoil. Historically gold has enjoyed an inverse relationship with equities and this makes it a strong bet in one’s portfolio. Hence taking into account the fundamentals for gold presented above, we strongly believe that gold as an asset class makes a strong case for inclusion in one's retirement portfolio (as it would insure / hedge your portfolio against the various risks it is exposed to).

Here are the - 4 Smart Ways to Invest in Gold

What is Insurance?

Insurance in its purest sense is protection against a financial loss / uncertainty which includes the risk of illness, disability, damage to property, and the most final of them all - one’s demise.

Human Life Value (HLV) of an earning member in the family could be defined as the amount that the family would require to retain the same standard of living in the absence of the earning member. This would be the maximum amount for which a person can seek insurance protection. The amount of insurance you require can be calculated in a few different ways - but a comprehensive method of calculating this is the PersonalFN’s HLV method.

How to calculate HLV?

The first step towards calculation of HLV would be to determine the net annual income of the person after deducting the amount spent by him for his personal use. This amount will be the amount that he affords to his family annually. For Example:

Mr. Sinha, aged 40 years, earns Rs 15,00,000 per annum and spends Rs 4,50,000 per annum on himself. Hence, he earns a net income of Rs 10,50,000 p.a. for his family. Therefore, as income replacement, his family would require Rs 10,50,000 p.a. for 1 year of life expenses.

Each year, with inflation, the family’s expenses would proportionately increase, which must also be taken into account. The calculation will also include specific goal related expenditure.

Furthermore, assuming Mr. Sinha has a son and a daughter, both of whom would require Rs 10 lakhs for their education i.e. a total of Rs 20 lakhs. In Mr. Sinha’s absence, this amount is still required such that the children’s education do not suffer.

Hence this goal amount can be added to the financial value of Mr. Sinha’s life.

Once the HLV has been calculated, the next step is to choose the appropriate insurance product to cover your needs.

There are a number of insurance products available in the market today – from term plans to ULIPs to endowment plans and so on. It is important to assess the available products and select the right insurance for your needs. At PersonalFN - we recommend opting for pure term plans.

The transfer of assets from one generation to another also known as estate planning is a must for every individual irrespective of the size of his or her wealth. Moreover, it is wise to make provisions to leave behind assets, from the very first day you acquire one.

"I am too young to prepare a will" or "I don't need to prepare a will", are common thoughts which pass by while thinking about writing a Will. But very few know the importance of Estate Planning.

It is important for you to know that living the world intestate (without preparing a will) can lead to various complications and disagreements among your heirs. You work your entire life to build wealth and a sustainable livelihood for your family members.

But you can't even imagine the mess and inconvenience that might be caused to your loved ones because of your laziness in not drafting a will for them.

PersonalFN believes for all these reasons and in order to avoid being the reason of agony for your loved ones, you must also plan for your estate on time.

Estate planning is one of the most essential aspects of our lives and should not be put off until it's too late.

It is a dynamic process, which needs to be reviewed at regular intervals of time to absorb any changes, which might happen in our lives or in the laws of our nation.

Read more on: All You Need To Know About Estate Planning

You can also download our free Retirement Planning Guide for your future reference.

Every individual may have a different view of how they wish to spend their retirement years. While some may want to buy a retirement house in a beautiful country side; some might want to travel the world.

Hence the cost associated with retirement will be different for every individual.

Based on your life expectancy and retirement plans, you must start investing for this goal from an early age.

It might also be prudent to consult a financial planner to help you plan and execute this systematically. 

And if you have a few years to go before retirement, we strongly suggest you sign up for our very popular service - The Retirement Letter. 

With every monthly issue of The Retirement Letter, we will walk you through the complete journey that can lead you to a self-sufficient and comfortable retirement. In fact, we will handhold you through every step that is crucial to plan your dream retirement. And there’s much more…

Take your first step towards your dream retirement and Subscribe Now

And on this note we wish you all Happy Retirement Planning 😊

And if you liked this guide on Retirement Planning, share it with your loved ones as well.