Retirement Planning

What is Retirement Planning?

Retirement planning is the process where you save and invest now to secure a comfortable life after you stop earning. It ensures you have enough money to cover your expenses, medical needs, and lifestyle goals in old age. 

Early retirement planning allows you to take advantage of compounding and achieve your set goals based on your future needs. 

Why Should You Plan for Retirement?

The following points highlight the importance of retirement planning in India:

1. Preparing for a Longer Life:

   • Life expectancy in India has risen to 69.7 years in 2020, and people are living longer than before.

   • You may need to plan for 20-30 years of retirement, so your savings should last longer.

   • It is important to consider healthcare costs, inflation, and daily expenses when planning for retirement.

2. Fight Inflation:

   • Inflation increases the cost of goods and services every year.

   • With an average inflation rate of 5%, the cost of living could double in just 14 years.

   • Retirement plans should help your money grow faster than inflation so that you have enough to cover future expenses.

3. Leave a Legacy:

   • Planning for retirement can help you create wealth not only for yourself but also for your loved ones.

   • Start saving early and invest in plans that give guaranteed returns to build a solid corpus.

   • You can also set aside some funds for charitable causes, leaving behind a legacy that goes beyond money.

4. Maintain Your Standard of Living:

   • The goal of retirement planning is to ensure you can live comfortably after you stop working.

   • To do this, estimate your future expenses and build a retirement corpus that generates a regular income.

   • Good retirement plans will help you maintain the lifestyle you are used to, even after retirement.

5. Fulfill Retirement Goals:

   • Retirement planning allows you to achieve your dreams, such as traveling or spending time with family.

   • Set clear goals and create a financial plan to achieve them.

   • With the right strategy, your savings will support your vision for a happy and secure retirement.

6. Be Emergency-Ready:

   • Unexpected events, like medical emergencies or home repairs, can affect your finances during retirement.

   • Build an emergency fund specifically for retirement, so you don’t have to touch your savings for these situations.

   • Make sure to consider inflation and rising healthcare costs when planning your emergency fund.

What are the Steps to Retirement Planning?

Follow these steps for effective retirement planning:

• Set Goals: Determine how much money you will need based on your lifestyle, inflation, and medical costs.

• Calculate Corpus: Assess your current savings and estimate the corpus required.

• Start Early: Invest regularly to benefit from compounding.

• Choose the Right Investments: Opt for the best investment options mix of equity, debt, and pension plans.

• Track Progress: Regularly review your investments and adjust based on life changes.

• Plan for Healthcare: Allocate funds for rising medical costs.

What are the Benefits of Retirement Planning?

Retirement planning offers many advantages, including:

• Financial Security: Retirement planning ensures you have a steady income and remain financially independent after you stop working.

• Tax Advantages: Buying retirement plans help you avail of tax benefits by contributng to Unit Linked Pension plans (ULPPs), NPS, and EPF under the Income Tax Act, 1961.

• Compounding Growth: Regular investments grow over time through the power of compounding, helping you build a larger retirement corpus.

• Encourages Saving Habits: Planning for retirement helps you develop disciplined saving habits for long-term financial stability.

• Peace of Mind: It gives you the confidence that your future needs and your family’s financial security are well taken care of.

• Emergency Fund: Retirement planning ensures you are prepared to handle unforeseen expenses, such as medical emergencies, without financial strain.

How Retirement Planning Works?

Retirement planning involves saving and investing during your working years to create a retirement corpus. Investments grow over time, generating returns that form a steady income during retirement.

Example Table: How Compounding in Retirement Planning Works

Example of Retirement Planning:

Shraddha, an IT professional, starts investing at the age of 30 years for her retirement:

• Her current monthly expenses: ₹25,000 a month.

• By age 60, she can get an annual return of 15% as per past performance of the plans

• At the retirement age of 60 years, as per the average inflation of 6% p.a., she will need the following amount as per Policybazaar Pension Calculator:

  • Monthly Expenses by 2055 (60 Years Age): ₹1,43,587 per month

  • To Get the Monthly Pension of ₹1,43,587, Sharddha needs to invest today: ₹4,787 per month in a mix of Unit Linked Insurance Plan and an Annuity Plan

Conclusion:

• Early Start Benefits: Shraddha, starting at 30, needs to invest just ₹4,787/month to secure ₹1,43,587/month at retirement (60 years).

• Impact of Delay: Starting at 40, the monthly investment jumps to ₹11,343 for a lower pension of ₹80,178/month.

• Inflation's Role: ₹25,000/month today will inflate to ₹1,43,587/month in 30 years (at 6% inflation).

• High Returns Matter: A 15% annual return significantly reduces the required investment for retirement goals.

• Diversified Approach: Combining ULIPs and annuity plans can ensure financial stability post-retirement.

When to Start Retirement Planning for Different Age Groups?

Retirement planning is crucial at every stage of life, and the ideal time to start varies by age group. The following list breakdowns for when and how individuals in different age brackets should approach retirement planning based on the latest insights:

1. In Your 20s

   • Savings Goal: Save at least 10-15% of your income.

   • Investment Options: Focus on high-growth investments like Unit Linked Insurance Plans (ULIP), equity mutual funds, stocks, or NPS (National Pension System).

   • Key Focus: Take advantage of compounding with a long investment horizon.

2. In Your 30s

   • Savings Goal: Increase savings to 15-20% of your income.

   • Investment Options: Diversify into equity (70%) and debt (30%) funds; consider ULIPs and employer-based retirement plans like EPF.

   • Key Focus: Balance between long-term growth and medium-term goals like buying a house or children's education.

3. In Your 40s

   • Savings Goal: Aim to save 20-25% of your income or more if you start late.

   • Investment Options: Maintain a balanced portfolio of equity (50%), debt (40%), and safer instruments like Annuity Plans, PPF or VPF.

   • Key Focus: Increase retirement contributions and focus on wealth preservation.

4. In Your 50s

   • Savings Goal: Allocate 30% or more of your income towards retirement savings.

   • Investment Options: Prioritize low-risk plans such as annuity plans, fixed deposits, Senior Citizen Savings Schemes (SCSS), or bonds.

   • Key Focus: Secure a steady post-retirement income and ensure funds are safe.

5. In Your 60s

   • Savings Goal: Focus on withdrawing savings conservatively to sustain retirement.

   • Investment Options: Opt for low-risk, income-generating instruments like Annuity Plans, SCSS, post-office monthly income schemes, or government bonds. Consider annuities for a regular income stream.

   • Key Focus: Protect capital and ensure a reliable income flow, while minimizing risks.

How to Plan Your Retirement using 4% Rule?

You can use the 4% Rule to calculate the amount you should save to stay financially secure during your retirement: 

• The rule suggests to withdraw 4% of your funds every year after retirement.

• The goal is to make your money last throughout retirement (Based on historical market returns, 4% is considered a safe withdrawal rate).

• To apply the rule, calculate your retirement needs, then save 25 times that amount.

Example Table: Savings Based on Expenses

So the 4% rule helps you simply estimate how much to save for a secure retirement.

What are the Key Points to Consider for Retirement Planning?

You must consider the following aspects before starting to plan for your retirement: 

• Set Clear Goals: Define your retirement age, lifestyle, and financial needs.

• Estimate Future Expenses: Consider inflation, healthcare, and daily living costs.

• Start Early: Begin saving and investing as soon as possible for compounding benefits.

• Diversify Investments: Allocate funds across different assets like equity, debt, and mutual funds.

• Utilize Retirement Plans: Maximize contributions with investment plans like Annuity Plans, NPS, Pension Plans, or EPF for tax benefits.

• Plan for Emergencies: Build an emergency fund to handle unexpected expenses.

• Reduce Debt: Clear liabilities like loans and credit card debts before retirement.

• Account for Healthcare Costs: Include medical insurance or a separate fund for healthcare needs.

• Review and Adjust Regularly: Monitor your retirement plan and update it based on changing circumstances.

Wrapping Up

Retirement planning is key to securing financial freedom and peace of mind in your later years. By starting early, setting clear goals, and investing wisely, you can build a steady income for the future. A well-thought-out plan ensures you enjoy your golden years without financial stress. You must plan your retirement today to create a comfortable and worry-free life in future.