Conventional images of the retired would have them pruning roses, playing golf, sipping tea or strolling by the seaside. But we might not be able to lead such a leisurely life after retirement unless we have planned wisely. "The most important part of retirement planning is knowing when you can retire and when you can't," says Kapil Mehta, CEO, DLF Pramerica Life Insurance. So, as the first step, you'll need to find out when you will have enough to live on without being compelled to return to income-generating activities when you are over 60. This will help you decide on an adequate retirement income and then you can work towards creating a corpus that can provide it.
While calculating the ideal retirement income, consider when you wish to retire, how long the corpus should last and what kind of lifestyle you wish to sustain in retirement. Also, factor in rising prices, the rate of inflation and increased interest rates.
A rule of thumb is to save 15 per cent of your pay for retirement regularly and over a long period of time. However, if you start later, you will need to save a higher percentage of pay (see How Much to Save). Which is why someone like Anirban Bora should, ideally, not wait much longer. When asked about his retirement plans, the 28-year-old Kolkata-based engineer laughs it off. "You must be kidding. Who is thinking of retirement now? It is too far away," he says.
This mindset is not exclusive to Bora. In fact, a recent Nielsen Consumer Confidence survey covering 14,029 consumers in Europe, Asia and North America found that nearly six out of 10 Indians put their spare cash in savings, but a mere 4 per cent drop it in the retirement kitty. With increased life expectancies, thanks to advances in healthcare and improved lifestyles, this corpus has to last a far longer period than ever before. This is why experts reiterate the importance of planning early for retirement.
Starting early lets you save more as you have a longer working life ahead of you. It also allows the power of compounding to work in your favour. "It's a lifelong process, not something that you plan for when you are nearing it," says Rishi Nathany, Kolkata-based financial planner and Director, Touchstone Wealth Planners.
The other advantage of starting early is that it gives you time to correct any flaws in your financial plan. "The advent of nuclear families, rising healthcare costs, and fluctuating interest rates and stock market returns can make some of the best-laid retirement plans go awry," says Vishal Gupta, Director, Marketing, Aviva Life Insurance.
No matter when you decide to start, make sure your corpus has two essential components: Liquidity and growth. Liquidity will give you regular income and cover contingencies and growth will ensure that your corpus takes care of future expenses and protects your standard of living. "Unlike the working years, when you have a steady source of income, the retirement years will see you creating a mix of regular income streams to manage essential expenses through regular cash flows," says Rohit Sarin, Cofounder and Partner, Client Associates.
You might also need lump-sum amounts to meet specific capital requirements, say for home repairs or travelling abroad to visit your children. The most important aspect of a retirement plan is that it should last you a lifetime. Just putting together a large corpus is not enough. You will also need to factor in the returns you will earn on this corpus, the prevailing rate of inflation and how much you withdraw from the savings pool.
Obviously, some of these factors cannot be quantified or controlled. But others can be managed well. Here's how you can do it:
Own a Home: Any planner or adviser will tell you that for a retirement plan to work, you will need adequate medical insurance, as well as a home. Both provide security in old age. More importantly, a house could also be a potential source of income. Take Bangalore-based A.S. Mahadevan. The 52-year-old plans to retire in four years and decided to buy a house to augment his income stream. He lives with his parents and knows that he will always have a roof over his head. He took a home loan to buy a house, rented it out and uses the rental income to pay the monthly installments.
R. Muralidharan, a 55-year-old, Delhi-based scientist, has followed a similar strategy. "Both my children are in the US pursuing higher studies and that takes care of their careers. I am soon going to move into a bigger home which will be sufficient for me to retire in with my parents," he says. To buy the bigger house, Muralidharan sold his small apartment and took a home loan to make up the shortfall. Some planners believe that it is risky to take a home loan at this age, but Muralidharan is convinced that his gamble will pay off. The bigger house is more in line with the lifestyle he wants after retirement, and the tax benefit he's getting on the home loan is icing on the cake.
But what if you can't afford a house? Rathnesh Rao has reason to worry. "I had other commitments earlier in life and am yet to find a house that I can afford and retire in," says the 50-year-old Hyderabad resident. It's never too late to start, but you have to be aware of the handicap you'll start with. "In your 50s, you can't hope for stupendous growth, and if you have been risk-averse all these years, you are unlikely to be risk-friendly now," says Sarin, the Client Associates Partner. In such cases, you have to either rescale your financial goals, including compromising on the standard of living you plan to maintain, or look at a second career to try and build the nest egg.
Insure Your Health: Health insurance is essential for your retirement. Like most aspects related to financial planning, it helps if you get this early on. That is, when insurance companies are willing to give you medical cover with few questions asked, and your premium payments are also manageable. Leave it for later, and you might not be able to get adequate cover. Moreover, you'll have to shell out a fortune on premium.
Investment Strategy: A standard retirement plan consists of two parts — wealth accumulation and withdrawal. In the accumulation phase, ensure that you have a good mix of financial assets, be it debt or equity, and real assets like property, gold, collectibles, etc. Those who are employed in companies that offer the provident fund facility, by default, have been saving for retirement.
This is an assured return scheme and takes care of the debt component of your retirement planning corpus. "In your late 40s and 50s, consider choosing investments in debt instruments to get an asset allocation that will have adequate cushion to manage equity volatility," says Zankhana Shah, Mumbai-based financial planner and Founder, Money Care, a financial planning firm.
However, for wealth creation, one should consider equities as an option. "Once you have assessed your risk profile, you can invest heavily in equities and leave the debt portion to your provident fund contribution," advises Shah. A mix of equities, equity mutual funds and equity-linked insurance products that can serve the purpose of wealth creation will fit the retirement planning stage.
All of this still leaves you with the element of surprise—the unexpected event that could demolish your carefully constructed plan. This is why it's essential to create a flexible plan that can be reprioritised. For instance, if you save 25 per cent a month for retirement but have to bankroll an unforeseen expenditure, you can cut back the nest egg contribution to say 5-10 per cent for a few months and then scale up at the first opportunity.
Yet, there are several people who have spent far more than anticipated on their children's education or, perhaps, on an aged parent's healthcare. "Events such as these might force you to draw from your retirement savings and look at growth investments late in life," says B. Srinivasan, a Bangalorebased financial planner. This is among the cardinal sins of financial planning.
Financial planners suggest that if you do not have a specific fund or plan for a goal, it's better to go slow on an existing plan than to wipe it out completely. "This way, you don't touch your corpus for each of your financial goals," he adds.
Obviously, planning for retirement is more than just putting away a tiny sum in a pension plan. Start planning early, and plan smart. This is the only way you can save enough in your retirement fund to let you prune the roses in your sunset years, without a care.
MAKING UP FOR LOST TIME
Try these strategies to build a retirement corpus in a short span of time.
Prepare to stretch your work life
Think of a second career, pushing back your retirement age to at least 65 years. If you have started planning really late, consider working till you are 70.
Plan for adequate cover and insure all risks
Cover all risks, be it life, assets, health or business. Shop for high-value covers with the least possible premium since you can't afford large outflows.
Prioritise your goals
If you need to choose between your child's education and your nest egg, consider taking an education loan to bankroll his studies while retaining your retirement plan.
Buy a house
Experts estimate that housing accounts for about a third or more of a monthly budget. Late starters need to get a house as soon as possible.
Create post-retirement income
A job that gives you good retirement benefits takes care of half your problems. But also invest in equities for growth. It won't be a risk since you will probably postpone retirement.
— Courtesy Money Today