Knowledge Centre for Retirement Planning
Retirement is important part of financial planning and it’s incomplete without retirement planning. Everyone wants to live contented life after retirement without any debts. In India only 9% of population are covered from any formal social security in the form of old age income protection. So there is major part of population which is not covered from any social security schemes. People whoself-financed for their retirement needs but they don’t have adequate resources to fund their retirement expenses.
- Why should I Plan?
- You might be thinking, why should I think about retirement now? I'm young and fit, I can think about it later. This procrastination can be a costly and financially dangerous mistake. Everyone should be looking to the future and planning for the day that they will no longer want or be able to work to earn a livelihood.
Retirement planning should be the most important goal as with our current "westernization" of culture, more and more nuclear families are springing up. Our kids are going away to work from home and it's very clear that they might not support us financially. In our hey days, it's just the husband and wife who need to cater to each other's needs. In such a scenario, being financially, mentally and healthy ready for retirement is very important.
- How much should I need for retirement?
- A) Rule of Thumb
The most common method is simply by using one of the general rules of thumb about retirement income. For years people have been told that you need to generate 75-80% of your pre-retirement income during retirement to maintain your current lifestyle. This is a fine place to start, but there are simply too many problems with this method.
First, we can't predict the future. We can make some assumptions as to why we will need less income during retirement such as not having a mortgage payment or no longer commute to work, but nothing is certain especially if you have a number of years yet before retirement. Another huge factor is health. While you may not have a mortgage payment during retirement you could find that you replace that with high insurance premiums or medical care that wasn't expected.
b) Detailed Estimate
A better way to determine how much you should save up for retirement would be to create a detailed estimate based on your specific situation. This means sitting down and taking a look at exactly what expenses you will or won't have in retirement, what sources of income you will gain or lose, and any lifestyle changes you may have.
- When to start investing for retirement?
- When should you start investing for retirement? This is an important question and one that is asked by people both young and old. As a general rule of thumb you should begin to invest as soon as possible. In other words, it is better to begin to build your portfolio around 25 years of age. The earlier you start the better chance you have of building a nice nest egg that is sure to hold you over in retirement.
There are many reasons why starting early is the way to go. First off, compounding and multiplier effect is a phrase you should become familiar with. Generally speaking, the longer your money has to grow the more you are going to earn. Year after year your money compounds and soon enough you will begin to realize big gains.
Also, the earlier you start to invest the better chance you have of riding out bad times in the market. For instance, if you are 55 and just began to invest today, with the stock market sinking, you will find it difficult to get a good return before you retire.
The best time to start investing for retirement is as soon as possible.
- Where to invest for retirement?
- Since retirement planning is long term in nature, the best bet is equity investment. Equity has known to return the most among all asset classes; however, only over a long period of time long term investing is the key here. Do not take exposure to equity if you want to make quick gains.
In equity, buy direct stocks if you have the capability to stomach the ups and downs of the stock market and can understand the financials of a company. If you cannot, go in for equity mutual funds. Mutual funds are the easiest way to riches for the small investor, so take best advantage of it. Opt for systematic investment planning when you go for the mutual fund route.
Having full equity exposure at any given point in time is not advisable. There is some debt that needs to be thrown in your portfolio as well. The best retirement planning tools in debt are public provident fund (PPF) and New Pension Scheme (NPS). These are the safest long term products meant for retirement. Avoid putting your money in for building retirement corpus other debt avenues like fixed deposits and bonds. The returns after tax are pathetic – such products are not meant for meeting long term goals like retirement at all.
Another avenue to explore could be real estate. In line with your asset allocation, one should buy real estate to generate some passive income in the form of rentals during retirement. This could be useful given the fact that you would stop bringing home your pay packet after 60. Real estate also appreciates over a long period – it is second in line after equities as far as returns are concerned.
Avenues to Invest in and create a healthy nest egg for retirement:
Direct Stocks
SIP of equity diversified mutual funds
Real Estate
PPF
NPS Avoid:
All kinds of Insurance policies
Fixed Deposits
Debt funds
Steps in successful retirement planning
- How much is your current yearly expenses.
- Calculate how much income you would need each year post retirement factoring inflation into account.
- Ideally consider 80% of your current incomeforpost-retirement years.
- Calculate retirement corpus you would need at retirement at present cost.
- Determine how much you have already saved for retirement.
- Calculate the shortfall in your retirement corpus.
- Calculate how much you should save per month to fund your retirement expenses.
- Determine your optimal investment vehicles and begin saving now.