Planning Your Retirement

There is a much bigger picture than just numbers to consider ensuring you live a happy and financially secure retirement

Retirement means different things to different people. For some it is freedom from work, for others it is about uncertainty and worry about their finances – will they have enough when they retire? A lot has changed about retirement, especially over the past decade with increasing number of nuclear families, longevity and the days of defined pension going away making planning for a corpus for retirement very important. Retirement is one financial goal which everyone unknowingly starts saving for the moment one joins organised workforce by way of contributions towards the Employees’ Provident Fund Organisation (EPFO). These days workplaces also offer a choice to contribute to the National Pension System (NPS).

For a 20-something starting their career, retirement planning may seem far away, but that is the beauty of planning for retirement – you have time on your side to save for it. There are numerous benefits of starting early, however small it may be, because investing regularly over long periods develops a habit to save and invest regularly. The biggest advantage of long-term savings and investments is the impact of compounding on the investment over time. As can be seen from (Perils of late start) the table, delay by as little as a few years, can impact the corpus that you may be able to create for retirement.

Unlike some financial goals such as purchase of a house, where you have a clear amount in mind, building a corpus for retirement isn’t easy. For those who are in their 20s, it may be very difficult to arrive at how much they will need when they retire. A reason why retirement planning takes low priority among youngsters is the inability to foresee a financial need many years ahead, especially when they can see far many financial needs looming in front of them – car purchase, vacation and a house. A way to address this inertia is to start investing towards building a retirement corpus with small sums other than the mandatory PF contributions.

There are several financial instruments available to build a retirement corpus (See: Retirement Corpus options) that are mix of both equity and debt asset classes. Ideally, given the long-term, retirement planning should have high exposure to equity as an asset class. This higher equity exposure could last even till one approaches their 50s. The higher equity allocation will work in your favour to counter inflation, which could otherwise adversely impact your retirement corpus. Moreover, returns from equity as an asset class has proved to outdo other asset classes in the long run.

By the time you are entering your 50s, chances are you are also peaking in your career and your earnings potential. You are also likely to be in a phase when your financial commitments may be reducing as you would have repaid your home loan and children would be in college or starting their careers. Any surplus that you have will do better if you park in towards the retirement corpus. You will also be in a better position to estimate how much you are likely to need each month when you actually retire.

Mutual funds, especially equity mutual funds are a good option to build a retirement corpus in the long run. Use the systematic investment plan (SIP) route to invest in equity mutual funds because it has all the necessary ingredients to help you create wealth over the long run. The other advantages of this approach is the discipline it instils in investors to stay invested over market cycles and time to reap the benefits of long-term investments.

Even for those with some years to go for retirement, a good indicator for the retirement corpus needed would be to assess their lifestyle expenses and how much of it will they require in their retirement. Think about expenses that you need to factor in retirement - like clothing or towards healthcare. Circumstances could also lead you to look after ageing siblings or parents. You may also face situations that may hamper your own health condition resulting in early retirement. Of course, remember to calculate inflation, as it is one factor that can play havoc with the best laid plans.

There are several online resources to help you arrive at a retirement corpus you need; use them to get an idea of what kind of corpus you may need or arrive at the sum you need to save now each month to reach your desired retirement corpus. Work towards multiple accumulation instruments to build a desired retirement corpus, as each one of them has inherent advantages. Do evaluate how your investments are faring to reach your retirement goal once in a couple of years to make any changes to your investments. To make retirement pleasurable and financially comfortable, you need to save more, start early and invest regularly. More than a matter of luck, it takes careful planning and implementation throughout your adulthood to achieve this goal.

It’s good that you are focusing on your retirement. Given the late start, it shouldn’t come as a surprise to you that you need to save more towards your retirement corpus. So, put away as much as you can each month till you retire through an automatic investment route like a systematic investment plan (SIP) in mutual funds. Assuming that you haven’t been an investor this far, it would be safe to start investing in balanced funds and gradually increase your allocation to equity funds.

You could also use your tax saving contribution under Section 80C towards ELSS (equity-linked savings scheme), which is a type of equity mutual fund with a three year lock-in of investments. A higher equity allocation is suitable, as you have more than a decade to invest for, assuming you retire at 60. There is another step that you need to take to take to improve your shot at a secure retirement – staying on the job for a few more years. This move may be tough to follow and stick to. But, it will give you a few more years to contribute money to your retirement savings and also allows more time for your savings to grow.