Take charge of your retirement planning strategy


The rising trend of nuclear families, increasing cost of healthcare, inflation etc make it necessary for an individual to plan for retirement

Niraj Shah

We have seen India change over the last two decades, notably there has been a change in the lifestyle of the working population. Purchasing power has increased considerably and so have the expenses.

An improved lifestyle and better medical facilities have led to increase in the lifespan of the average Indian. In the past, a salaried person would retire at 60 and live up to the age of 67; however, now the lifespan of an individual post-retirement has increased by at least 20 years. This implies that an individual needs to have sufficient funds to be able to lead a comfortable life once he or she stops working.

If a person spends Rs. 25,000 a month, assuming an inflation of 7%, his expenses after 25 years would increase to Rs. 1,36,000 a month. Add to this medical expenses, which increase with age and occasional expenses such as gifts – it could actually exceed Rs. 1,50,000 a month.

Most private sector companies do not provide pension. Additionally, the rising trend of nuclear families, increasing cost of healthcare, inflation etc make it necessary for an individual to plan for retirement. The objective is to have a regular flow of money after retirement that will enable one to manage the increased expenses without compromising their lifestyle.

Today, consumers have access to products which enable them to plan for their retirement. While the awareness for retirement planning is increasing, most of us delay investing for it. Starting at an early age can significantly enhance realisation of an individual’s dream to achieve financial independence in the golden years.

When is the right time for me to start retirement planning?

Well, in case of retirement planning it is said ‘the earlier the better’, however, it is never too late either. Starting early gives you the benefit of time, which coupled with the power of compounding, enables you to create a sizeable corpus that can enable an individual to take care of expenses after retirement.

The table below illustrates how retirement planning can be done at different ages to generate a similar income once you turn 60. 

If you were to start saving at the age of 

You will need to save money for (in yrs)

The amount you will need to invest p.a.

Your corpus at the age of 60 will be

Pension you receive for self, then wife after which corpus is returned to children/ beneficiary

35

25

Rs. 1 lakh

Rs. 67 lakh

Rs. 4.5 lakh p.a

50

10

Rs. 5 lakh

Rs. 72 lakh

Rs. 4.8 lakh p.a

Though the amount required to be invested is more if you delay your planning, the key word is ‘regular investment’. It is only through regular disciplined investments that you can put aside a corpus that will generate enough income to enable you to live your life comfortably after retirement.

How do I plan for my retirement?

Retirement planning can be done in 3 simple steps:

Step 1: How do I calculate my expenses post retirement?

Take into account your current expenses and factor in aspects like inflation, increased medical costs, vacations, gifts for family etc. You will then arrive at an amount that you will require for living comfortably once you have retired. You need to keep in mind that inflation will cause your expenses to increase (even if you are spending on the same items). One can eliminate costs like education of children and rent, if you own a home.

Step 2: What will be the savings pool I need to build?

Once you have an idea of your expenses, you can accordingly establish the quantum of amount (corpus) required to be built – the amount that you need for meeting the expenses. This savings pool will be created taking into consideration the inflation factor.

Step 3: How much do I need to save now?

Depending on your financial status, determine the funds which can be put aside for building the desired retirement corpus. Start saving now so that you have time on your side and can enjoy the power of compounding.

For example, if a 35 year old person wants Rs. 50,000 every month for meeting expenses after retirement, he needs to start planning now. A corpus of Rs. 75,00,000 will be required to generate the desired amount. For this purpose, one needs to invest Rs. 10,000 every month in a retirement plan.

How should I choose a retirement plan?

Studying the features and the charge structure of a retirement plan is important. Ideally, selecting a plan which has a low charge structure will enable you to contribute more towards your investment.

A good retirement plan would:

Provide returns that beat inflation

Give you the flexibility to choose your investment strategy as per your risk taking ability

Protect your capital from market fluctuations

Inculcate a regular saving habit – to ensure the corpus is built in an uninterrupted manner

The writer is senior vice president-head product management, ICICI Prudential Life Insurance.

 

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