The easy path to planning

Life after hanging up your boots can be bliss or a bane, depending on the state of your finances. Here’s a lowdown on retirement planning.

Narayan Krishnamurthy        Print Edition: September 2009

How Much To Save
Starting to save earlier in life allows the power of compounding to snowball your retirement corpus
Starting Age
% of salary you need to save
25
9.4
35
13.3
45
20.4
55
39.6
Figures are percentage of salary you need to save at a particular age to build a retirement corpus, which will provide you with an income equivalent to 70% of the salary after 65 years; assuming 7% interest, 5% annual salary increments and 3% inflation

Conventional images of retired people have them pruning roses, playing golf, sipping tea or strolling by the seaside. We would all like to be in their place, wouldn’t we? Sadly, we might not be able to indulge in these activities—unless we have planned wisely for the post-career years. “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. To know when you can retire, 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.

That’s the first step to retirement planning. Each person should decide on an adequate retirement income and then work towards creating a corpus that can provide this income. While calculating the ideal retirement income, consider when you wish to retire, how long the corpus should last and your lifestyle in retirement. Remember to factor in the rising prices and the rate of inflation, as well as increased interest rates.

A rule of thumb is to save 15% 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. His peers, largely the yuppies (young upwardly mobile professionals), arpies (asset rich but penny poor), DINKS (double income, no kids), and any other acronym you can think of, are convinced that it’s way too soon to start planning for a far-off date with the rocking chair. This trend seems universal going by the results of the latest quarterly Nielsen Consumer Confidence survey, which covered 14,029 consumers in Europe, Asia and North America. The survey found that nearly six out of 10 Indians put their spare cash in savings, but a mere 4% drop it in the retirement kitty. Apparently, spending on new technology products (33%) and outdoor entertainment (22%) is considered more worthwhile.

Hardcore spendthrifts will tell you that increased consumer spending is good for the economy. What they fail to realise is that profligate spending is generally at the cost of their retirement corpus. 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.

After the decision on life insurance, retirement planning is the single most important financial decision that should be taken by an individual, says experts. This is because the government provides little by way of social security. It’s not a problem unique to India. Across the world, governments are moving away from providing guaranteed retirement benefits and several are offering market-linked returns.

What all this means is that your future, quite literally, is in your hands. If you anticipate a comfortable retired life, start saving now, no matter what your age. If you’re earning, you should be putting something away for those sunset years. If you’re like Bora, secure in the belief that retirement is far away and you have plenty of time to start thinking of planning for it, here’s some news for you. 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.

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