Most of us like to live in the present, so much so that often, we end up ignoring the future. We splurge on present needs and retirement planning to most of us is something esoteric that is best relegated to financial planning magazines.
To be sure, saving and planning for retirement is a real and urgent need; it's a lot more urgent than the latest mobile or car or the grand vacation to Europe.
And retirement planning is too pressing and long-drawn to be taken up when you are a just few years away from retirement; by then its probably a little too late in the day to wake up to the rigours of retirement planning.
At Personalfn, our recommendation to clients is to save for retirement at an earlier stage of their lives. This helps in two ways, a) it reduces pressure on finances at a later stage and b) it enables one to aim for an ideal retirement scenario and not a compromise.
In this article we outline a 5-step strategy for retirement planning.
1. Start early
One reason why retirement planning is looked upon with much apprehension and even distaste is because most investors are late off the starting blocks. When they finally get down to saving for retirement, there is the initial resistance and protest.
If the same investor had commenced his retirement planning exercise a little earlier, a lot of those complaints against retirement planning probably would have evaporated. So the secret lies in making an early start. We have an illustration on how 'expensive' retirement can become for the 'late riser'.
It pays to start early
|
Particulars |
Ravi |
Vijay |
Rajesh |
|
Present age (years) |
25 |
30 |
35 |
|
Retirement age (years) |
60 |
60 |
60 |
|
Investment tenure (years) |
35 |
30 |
25 |
|
Monthly investment (Rs) |
5,000 |
5,000 |
5,000 |
|
Returns per annum |
10% |
10% |
10% |
|
Sum accumulated (Rs) |
16,993,955 |
10,314,217 |
6,166,624 |
|
Percentage of Ravi's corpus |
NA |
60.7% |
36.3% |
Ravi starts saving for retirement at the age of 25 years. Assuming he plans to retire at 60 years i.e. he has given himself an investment time frame of 35 years. This is a good period over which to save for retirement.
The longer the investment horizon, the more you can benefit from the power of compounding. Ravi starts investing Rs 5,000 per month at the rate of 10% per annum to accumulate Rs 16,993,955 at the time of retirement (60 years).
Ravi's colleague, Vijay, who is 30 years old, commences his retirement planning at the same time. Given that he also aims to retire at the age of 60 years, he has an investment horizon of 30 years. Assuming, like Ravi, he invests Rs 5,000 every month @ 10% per annum, he will accumulate Rs 10,314,217 at retirement.
On the same lines, Rajesh, Ravi's other colleague, commences investing at the age of 35 with an investment horizon of 25 years to accumulate Rs 6,166,624 at the age of 60 years (at Rs 5,000 per month @ 10% per annum).
It is apparent from the table, the magnitude of the lead Ravi has over his colleagues in terms of a retirement corpus. Given that all three of them have the same monthly investment (Rs 5,000), which is invested at the same rate (10% per annum), the difference can be attributed completely to Ravi's early start vis-à-vis his colleagues.
Vijay who has an investment tenure that is lower than Ravi's by only 5 years accumulates a corpus that is nearly 40% lower than Ravi's. Rajesh, whose investment tenure is lower than Ravi's by 10 years, accumulates 64% lower than him on retirement. A 5-Yr delay in retirement planning sounds like a small difference, but the power of compounding magnifies it to gigantic proportions.
2. Make a plan
Before you embark on saving for retirement, you must have a plan in place. While a plan may sound fancy and even intimidating, rest assured it is not all that complicated. Your retirement plan is simply your wishlist of how you wish to spend your twilight years.
For instance, if you wish to retire in the suburbs in a 2-bedroom flat with a porch outside the house with a monthly income of Rs 30,000, then you must make a financial plan based on these inputs. Put simply, this plan must incorporate all your inputs to tell you how much you need to save today to live your dream retirement.
Among other expenses, when you plan for retirement, you must make it a point to set aside money for medical expenses and contingencies, as any retirement plan without them is incomplete.
3. Consult a financial advisor
While retirement planning is a process that requires a high level of involvement from your side, you must look for someone to partner you. The partner over here is your financial advisor. While you have to decide how you wish to lead your life in retirement, your financial advisor will help you translate that dream in numbers.
He will put a number to everything i.e. your dream house, vehicle, post-retirement income, medical expenses and contingencies among other inputs. He will tell you how much you need to save and where to invest your savings so as to achieve your retirement corpus. In other words, he will outline a roadmap and more importantly, will implement the same for you.
4. Track and review your plan
Once the plan is outlined and implemented you have to still ensure that you are on track at all times to meet your targeted return at the desired level of risk. This calls for a periodic review of your investment plan. This is a task that is best left to an expert, which is where your financial advisor will once again have a role to play.
He will actively monitor your investments, exit the investments that are not performing up to the mark and invest in alternative investments. Over time as you approach retirement; he will reduce allocation to risky assets like stocks and/or equity funds in favour of more conservative avenues like fixed deposits.
He will also alter your investment plan based on any additional inputs you give him (maybe with a change in lifestyle you may choose to have a 3-bedroom flat instead a 2-bedroom one).
5. Don't dip into your retirement savings
To successfully implement your retirement planning calls for loads of investment discipline. One aspect of discipline involves religiously setting aside the money that is committed towards retirement. Another aspect of discipline relates to treating your retirement corpus as sacred.
This means that every time you are confronted by a financial emergency you should not rush to withdraw from investments that are earmarked for retirement. Of course, if there is no way out, then you can withdraw from your retirement kitty, but make sure you make good that withdrawal by putting an equal amount at the next opportunity.
By Personalfn.com, a financial planning initiative. It can be reached at info@personalfn.com. Personalfn.com also publishes a free-to-download financial planning guide, Money Simplified. To get a copy of the latest issue - How ULIPs fit in - please click here.