Retirement is one of the key reasons for working hard now and earning - specifically to enjoy one’s retirement. The ideal method to plan for one’s retirement is to first decide the retirement age, then to analyse the required lifestyle, and then to calculate the required corpus based on these factors - taking into account other factors such as interest rates, inflation, healthcare costs, etc.
It is highly advisable to start saving early in one’s career - this will give you the advantage of additional years of investing and you can benefit from the magic of compounding. Although getting someone in their 20's to plan for their retirement is wishful thinking, if they do invest & save for retirement, the corpus will be substantially higher than if they start in their 30’s. One should also make investments towards their retirement savings via the ECS route - making the whole process automatic, and ensuring that no surplus expenditure gets in the way of your retirement planning.
It is also very important to define and write down the objectives of retirement. It is not only about budgeting but also about the goals that need to be achieved. Being specific is better while setting goals, for example - instead of mentioning travel, it is advisable to list out the places one wishes to travel to. It is alright to have a vague goal but start streamlining as you proceed towards retirement. Also, ensure adequate medical cover, so that all medical expenses and any emergency situations expenses are met by the Insurance company and does not fall on you during the retirement tenure.
There are likely to be changes along the way to your retirement plan based on your changing lifestyle, career path, health, etc. It is always better to project on the higher side when planning for retirement as one wants to ensure that there are sufficient funds available for all their needs during their ‘golden years’. One should also take into account any major retirement plan that one has, such as purchasing a new house, traveling, etc., while estimating the required retirement corpus.
It is necessary to look into the various assets possessed and the income generated from such assets. Sometimes it may require to change or diversify the investment portfolio accordingly to manage the risk and return. For example: A portfolio of equities could be rearranged to a portfolio of fixed income, to bring in security during retirement phase.
Paying off the debts as soon as possible – even before retiring, helps in avoiding interest payments. As the source of income stops, it is very important to pay off such debts as it adds a burden of payment after retirement. But if such debts have not been paid off before retiring then make sure that your budget includes monthly payments to eliminate debt.
Apart from keeping a check on income and expenses, it is very important to keep track of assets. Traditional assets such as land, additional house, etc. could prove a beneficial source of capital in later years. Beside these, other assets such as antiques, paintings, even wine could give good returns on investment. But such income does not reoccur on regular basis.
Ideally, one should be able to retire when their income from savings matches the expenses, and if one can achieve financial independence earlier in life, it gives one the freedom to choose when to retire. It is advisable to plan to retire on the income from savings rather than the principal, as in the event of an unforeseen emergency there might not be enough principal left to cover one’s remaining years.
Summary:
- Retirement planning should start early - the 30’s would be best although
- Take into account the lifestyle, retirement age, big ticket expenses, etc., prior to deciding on a retirement corpus
- One can tap other sources of income such as company & government pension plans, reverse mortgages, etc., as well
- Medical expenses will be substantial and should be budgeted for
- It is advisable to plan on the higher side when deciding the corpus
- Try to use only the interest from savings and not the principal
(Author Anil Rego is a personal finance expert. He is CEO & Founder Right Horizons)
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