Retirement Planning

Retirement planning doesn’t mean one should only concentrate on their finances. Retirement planning requires a combination of financial and personal planning. Personal planning determines one’s satisfaction during their retirement.

On the other hand, financial planning helps in budgeting income and expenses based on the personal plan.

Primarily personal planning revolves around the question ‘how does one want to spend their retirement?’ Having an idea of how retirement should be will help in determining financial needs. For example, some might want to travel the world during their retirement, while others would like to learn a course or two, or volunteer at an NGO. The retirement options are endless.

However, having an idea about how one would want to spend their retirement is the first step towards retirement planning. The lifestyle needs and preferences will help in estimating the finances. Therefore, financial planning will help in creating a retirement fund.

Following are the reasons why retirement planning is essential:

• • One cannot work forever.
• • The average life expectancy is increasing.
• • Higher complications, e.g., medical emergencies.
• • Best time to fulfil life aspirations.
• • Relying on one source of income is risky, e.g., pension.
• • Do not depend on children.
• • Contribute to the family even during retirement.
• • Start planning early and diversify investments.

Therefore, to lead a peaceful and uncompromised life during retirement, it is essential to start planning and investing towards it.

Stress-free life

This is the most significant outcome of retirement planning. Retirement planning helps to lead a peaceful and stress-free life. With having investments that earn regular income during retirement leads to a worry-free life. Retirement is the age where one has to relax and reap the benefits of all the hard work.

Money works for you

In the younger days, everyone runs after their 9-5 jobs. Everyone works to earn money and have a good living. However, retirement days are the days where one cannot work any longer. Therefore, it is the time when the money one earned should do all the work. To achieve this, one has to start their investments towards retirement at a very young age. Starting small also helps in generating significant returns in the future. Hence a retirement fund should be a well-diversified portfolio, that’ll have the capacity to generate returns during retirement.

Tax benefits

Retirement planning also helps in tax saving. For example, investments in PPF and NSC qualify for tax exemption under Section 80C of the Income Tax Act. These are long term investments suitable for retirement. There are a variety of investment options available for retirement planning at the same time also qualify for tax saving.

Cost-saving

Planning for retirement at a young age will help in reducing the cost. For example, in an insurance policy the premium amount to be paid will be lesser when the policyholder is younger. While getting insurance during retirement becomes costly.

Inflation beating returns

Investing in retirement will help in earning inflation-beating returns. Holding money in a bank savings account will not generate high returns. In other words, the interest earned will not be enough to lead an uncompromised retirement. Therefore, proper investment planning will help one to generate significant returns in the long term. Also, it is important to start investing early. This helps in averaging out the impact of market volatility.

One has to start planning for retirement right from the time they start earning. Starting a retirement fund at early stages of life will help accumulate a sufficient corpus. Moreover, it reduces the burden on individuals as they are nearing their retirement age. People often postpone planning for retirement as they think that it’s 30 years away. But investing towards retirement in the early stages of life when the financial responsibilities are minimal helps reduce the burden of investing for it later.

Planning for retirement isn’t rocket science. All one has to do is follow the steps below:

Determine the investment horizon :

To determine their investment horizon, one has to decide the age at which they want to retire. Then calculate the number of years left until retirement. This is the investable age or the investment horizon for the investor. Also, investors have to determine until what age they are planning the expenses for. For example, an investor who is 25 years old, wants to retire at 60 and wants to plan for expenses until he/she turns 80 years old. The investment horizon for this investor is 35 years old. And he/she has to ensure that their current investments should help them meet their expenses until they turn 80 years old.

Estimate the expenses :

The next step is to estimate the current expenses. They have to determine what are the everyday expenses that the investor has to pay regularly. This need not include child educational expenses or EMIs as the investor might not incur this after retirement.

Have a contingency fund for retirement

Having a contingency fund for medical expenses is a must during retirement. Medical expenses during the age of retirement can be expensive. But estimating these can get difficult. Hence, it’s advised to have an emergency fund for the same.

Decide on the asset mix :

Investors can take the help of a financial advisor and decide on the asset classes to invest in. It is suggested that investors invest in assets that give inflation-beating returns. Inflation is a significant threat to any investment. Post inflation, the real return from an investment is lower than the expected return. Hence investors have to invest in assets that give returns higher than the inflation rate.

Start investing early :

Investing in the early stages of life not only helps in creating a huge corpus. But also reduces the financial burden of investing a lump sum amount in creating a retirement fund. By investing at an early age, one is buying more time for their investments, thus increasing the effect of compounding on their investments. Also, they can invest small amounts regularly to reach their target amount.

Avoid using the funds kept aside for retirement :

One major mistake people make is to use the money set aside for retirement. Investors should refrain from using the retirement fund for a child’s education or marriage or any other purpose. Instead, investors can plan out their life goals and allocate some amount towards it every month. This way, each financial goal will have its corpus.