Planning your retirement by creating a solid nest egg is a dream of most individuals. After all, everybody dreams of stopping work at the age of 50 and then probably retiring to the hills and spend time at leisure. But that is easier said than done. Post retirement life is when your income flows will stop but then your expenses don’t. That is where the challenge comes in. The earlier you retire, the longer you will spend without earning and that can be quite a drag. The good news is that you can plan for it. But planning for retirement is not just like any other investment decision. It is a long term commitment and you really cannot afford to take chance. So, let us look at the steps to take before retirement and how to plan for retirement.
In short, you not only need to plan a happy retirement but also plan for a long retired life. You need to be financial prepared for it. Let us look at a quick retirement planning guide by focusing on the 7 key things to keep in mind in retirement planning.
1. This is like Rule 101 but the earlier you start the better
This is true of any kind of long term financial goal planning. The earlier you start, the longer you have to invest and more the power of compounding works in your favour. When you start earlier, you can create a large corpus with a smaller monthly outlay. Also, things don’t go as per your plan and in fact they normally don’t. When you start early and have a long time to retirement, you can even adopt course correction along the way. That is a luxury you do not have if you start too late in the day. It also follows logically that you must adopt a SIP approach to retirement planning as it syncs with your flows and also gives you the added benefit of rupee cost averaging.
2. Work out how much money you actually require for retired life
This is one of the most important decisions to be taken. You don’t know for sure but you can make some rational assumptions about how much money will be required after 25 years or so. Rule number 1 is to be aggressive in inflating costs into the future and take inflation higher than the current rate. The second rule is to be conservative in projecting long term returns. Last, but not the least, your retirement plan is not a static document. Keep evaluating at every milestone that your plan is on target.
3. Forget you age, your mix of equity and debt must be dynamic
What should be your mix of debt and equity is hardly a straightforward question. The traditional (100-age) formula is anything but scientific and you need to go beyond that. When you have 20 years to retirement you can afford to be predominantly in equities. However, as the goal date approaches you must look to progressively shift into debt and subsequently into liquid funds. Tweaking the mix as you go along is one of the key things to remember in your retirement plan.
4. You take home money post tax, so don’t ignore taxes
The retirement corpus has to be meaningful in post-tax terms, not just in pre-tax terms. Avoid churning your retirement portfolio frequently as it will have tax implications. In case of debt funds prefer the growth plan and work out an SWP rather than focusing on dividend plans as these dividend plans are not tax efficient. When you compare equity and debt funds on post tax basis, remember that debt funds get the benefit of indexation on LTCG but equity funds do not get the benefit of indexation on LTCG.
5. Split your retirement money between a lump-sum and regular annuities
In case you choose to stop working after your retirement, ensure that your retirement corpus can take care of your regular monthly requirements as well as your emergency and social requirements. Retirement plans are devised as a mix between lump-sum flows and regular annuities. Structure you annuities in such a way as to generate optimal returns.
6. Once you are retired, ensure that you don’t carry any debt
Debt has been bad word for a long time and more so when you are retired. The retirement plan must focus on being debt-free by retirement. That includes liabilities like home loans, car loans, personal loans, multiple credit cards etc. That way, you don’t have to worry about a liquidity crunch nor do you have to worry about losing your assets that are funded. It is very important to start your retirement with zero debt.
7. You still require insurance post retirement
If have an ongoing life cover, make it a point to continue your life cover even after you retire. That gives a sense of security to the spouse. More importantly, ensure that you have adequate medical insurance cover for yourself and your dependent family post retirement. Ensure that your assets and property are insured to avoid any nasty surprises.
There is a saying that the more you sweat in peace, the less you bleed in war. That truly applies to your retirement planning.