Nothing in life is more certain than taxes, death…and retirement. There will come a time when you will stop lugging your briefcase wearily to the office and relax at home. There will come a time when you will not be earning a regular salary any more; or at least the stream of your income will shrivel up. Yet, most people often remember retirement just a few years ahead of the R-day. That’s when the jitters start. So, what do you do now when you should have begun planning for retirement the day you started working? But once you have awakened to the importance of making a financial plan for your retirement, go for it with a vengeance. After all, it is better to start late than never. No matter what the age at which you begin thinking about making your golden years financially secure, there are ways to make your dream nest egg a reality.
TIMING YOUR RETIREMENT
There’s no fixed age for retirement. Ultimately it’s your decision about when you want to hang up your boots. You can decide to stop working at 50, or if you aim to retire at 40, you can build a good enough corpus for that too. Or you might decide to work till you’re 70. You could go in for semiretirement and work as a freelancer. So, your foremost aim is to mark out the age by when you wish to retire. All your planning depends on this age, as it determines the time for which you will be earning a salary and the years you will have to live off your savings. Suppose you are 30 years old and plan to retire at 45, you only have 15 more years to build a corpus. And it will have to be substantial since you will be living off that corpus for the next 30-35 years. But if you plan to retire at 60, that gives you 30 more years to build your corpus. And you may not need quite a lot since you will only be living off it for, perhaps, 20 years or so. Hence, the first step is to determine what age you wish to retire at and your life expectancy.
CHALK OUT YOUR CORPUS
You’ll have to keep a realistic goal that you can realise in the time you have. Don’t expect that the zeroes will multiply automatically in your savings. See how much you can afford to save every month. Of course, if you start at a late age you will have to increase your savings substantially, so cut down on any superfluous expenses. Starting early will help you benefit through the power of compounding, that is, you have more time for your money to grow.
Prepare a budget which lists what you spend on necessities so that you know how much your monthly/annual expenditure will be in the future. Account for inflation too. Keep a rough estimate of 7-8% inflation every year. Also, consider expenses that are bound to increase, such as medical and transport expenses. Then again, calculate the expenses that may cease to exist, such as your children’s education. Check out the table on the previous page to know how your expenses will change after retirement.
DON’T TOUCH THOSE SAVINGS
More often than not, people have combined savings, that is, they save money for all their financial goals together— retirement, children’s education, their marriage, buying a home, etc. Invariably, you spend more on your initial financial goal and end up depleting your savings. By the time you retire, you have barely any money left. Overcome this obstacle. Build your retirement corpus separately, and do not touch it. It’s always better to earmark the time period for your goals and make separate portfolios for each of these goals. For instance, your children’s education may be a short-term goal (compared with retirement, that is). Since retirement is a long-term goal, if you are starting early you can afford to take risks and invest in equities. But if retirement is a short-term goal, that is, only 5 years away, you won’t be able to take any risks. You’ll be more concerned about security. In that case, invest in debt instruments.
HAVE REALISTIC INVESTMENT GOALS
This is a toughie. Overestimating the returns that you will get from your investments could lead to a financial crisis in your later years. For some instruments you already know the returns, such as 8% from PPF or 9% from Senior Citizens Savings Scheme. But for others such as mutual funds or shares, keep a conservative estimate of 12%. Don’t be taken in by those who promise you whopping 30-35% returns. Of course, if you are lucky you may earn even up to 40% returns, but don’t bet your future on chance. After all, having more could make your life cushy, but having less might pinch you a lot.
WHERE TO INVEST
There is no fixed thumb rule for this. Aim for a mix of equity and debt according to your risk appetite and the number of years to retirement. The more time you have, the more risk you can take. Choose equity funds and blue-chip stocks as the core of your retirement savings. This will also depend on the stock market scenario. During volatile times, such as the present, invest with a long horizon. For instance, buy blue-chip stocks and stay invested for more than 5 years. If you don’t want to remain invested for a long period, then stay away from stocks. You can top up investments over the years but do not build a gigantic portfolio.
If you start early, by the time you hit the retirement age of around 55 years, you can focus more on safer options like balanced funds, debt, fixed maturity plans, etc. About three years prior to retirement, experts suggest that you shift these investments to debt options which will generate your monthly income.
THE IMPORTANCE OF ASSET ALLOCATION
More important than the skill of buying stocks or mutual funds is knowing how to balance your portfolio. All assets should find some place in your portfolio. Asset allocation simply means diversifying your investments across all asset classes such as stocks, bonds, real estate, jewellery, etc. Your asset allocation will depend on various factors such as your age, risk tolerance, the market situation, your financial goals, etc. Allocating assets is important because it helps you minimise risks as it enables you to put your eggs in different baskets. Also, you will need to constantly rejig your portfolio to re balance your asset allocation.
When you are younger and can afford to take more risks, invest primarily in stocks and less in bonds. But when you have, say, about 10-20 years to retire, invest equally in equity and debt.When you have only 5-10 years to retire, invest more in secure debt instruments rather than equities as you can’t afford to take risks at this late stage of your working life. You could also invest in gold since it’s your best bet against inflation.
PAY OFF YOUR DEBTS
Before you retire make sure you have invested in real estate, since paying rent usually makes for the bulk of monthly expenses. It makes sense to buy a house while you are still working as you will be getting a good salary and will be able to pay off a home loan easily. Also, banks are more willing to give you a loan. Plan for your home loan tenure in such a way that you will have paid off your home loan before you retire. Also, try to ensure that you have paid off all your debts such as car loans or personal loans before retirement.
CONSIDER THESE RISKS
Life is rife with risks. But proper planning can help you overcome most of these. Here are a few risks to consider when planning for your retirement:
a) Inflation risk – What you get out of your savings also depends on inflation. Rising inflation often squeezes your investment returns, so you’ll have a lot less in your pocket than you hoped for. On the other hand, you will also need to spend a lot more than what you had anticipated in your budget. In such instances, always err on the side of caution. While building your corpus, consider inflation at a higher rate of, say, 7-8% or even 10%.
b) Investment risk – The returns are impressive, but the investment avenue is also risky. Should you go for it? While investing, always do your research. Don’t follow blindly what everyone seems to be doing. You can’t afford to since this is the money that you will be living on for the rest of your life.Why risk it? Remember, the higher the returns, the riskier is the financial product. If you are young, let’s say 35, you can afford to invest in highrisk, high-return instruments. After all, you have time to set things right if they go wrong. But if you are closer to retirement, say 50, you won’t have time to correct things if they go awry. So invest in secure financial instruments. Though the returns may be on the lower side, the risk is minimal too.
WHAT COULD GO WRONG
If you’ve retired after a government job, you can look forward to a pension, but that may not be enough to sustain the kind of lifestyle that you are accustomed to. So, obviously, you need a bigger corpus. Also, if you won’t be getting a pension after retirement, then the bulk of your income will come from your savings. So, consider a few scenarios where things may go wrong.
a) Outliving your savings -This will happen if you have underestimated your life expectancy or overestimated your investment returns. In case you own a house, reverse mortgage can come to your rescue.
b) Investment losses - If your have invested heavily in any instrument related to the stock market, such as mutual funds or shares, you should be prepared for circumstances when your savings will lose a lot of money. The only way out of this is to wait for some time because markets tend to rise in the long run. Or invest in only the most secure instruments.
c) A spurt in expenses - It’s not just medical expenses that you have to be prepared for. It could also be something as simple as renovating your home or hiring a driver. So keep a cushion for such expenses too. Also keep a careful rein on your spending even after retirement.
