Planning for your retirement is one of the key components of your long term plan. Like in case of most of the other constituents of financial planning, in case of retirement planning also the earlier you start the better. It is only when you start early that the power of compounding will work in favour of long term growth. The longer you invest, the more you save and hence the more you invest at attractive returns. Over a period of time, it is not only the principal but even the returns that earn more returns. But then retirement planning is not just about returns and the power of compounding. Here are 5 special considerations that you need to consider as part of your retirement planning..
Keep constantly adjusting your risk-return trade-off..
All financial planning is essentially a risk-return trade-off. When you have 30 years to go for retirement, you obviously need to start off with a larger exposure to equities. As your age progresses and based on your financial considerations your risk appetite will reduce and the equity component has to come down proportionately. A very important consideration is liquidity. You need to start planning a gradual shift to near-money assets at least 2-3 years prior to your actual retirement. Don't take a chance with illiquidity costs towards the fag end of your retirement.
Strike a balance between lump-sum and annuities..
Post retirement, your financial needs will not only be a lump-sum corpus but also regular income in the nature of annuities. You need regular flows to pay your routine expenses and that calls for an annuity component planning. There are annuity plans that will automatically bifurcate and ensure that you get some part of your savings as regular annuity income. The other method is to invest the corpus in a debt fund or liquid fund and structure it as a systematic withdrawal plan. Try and compare which of these options measures higher on the return and the risk scale. The moral of the story is that when you plan your retirement you also need to provide for your annuity income apart from a certain corpus for your emergency needs.
Make your retirement planning fully tax efficient..
This is a very important consideration when it comes to retirement planning. When you are planning your retirement, the reason we suggest a higher component of equity in the initial years is that dividends are tax-free and so are long term capital gains. These will ensure above market returns on your investment in post-tax terms. Once the initial corpus is created through the power of compounding, then all you need to do is to ensure that the corpus is sustained till your retirement and after. But another important consideration is what happens to your long term investments in LIC endowments and provident funds. Remember, these instruments are shifting to the EET (Exempt, Exempt, Taxed) mode at some point and you may end up shelling out a huge sum as tax as it will be shown as income in the year of redemption. This can entirely change the economics of your retirement planning.
Take care of your insurance and your debt..
These are two very important factors in retirement planning. Ensure that your outstanding debt is cleared well before you retire. This includes your home loan, children's education loans etc. A debt-free retirement gives you a lot more flexibility to plan your post-retirement activities. Debt imposes a regular cost on your resources and that is something that is best avoided. You need to put a lot of focus on insurance. Ensure that medical insurance is fully taken care of so that emergency medical expenses do not hamper your retirement corpus. Many people believe that life insurance is not required after retirement. Remember, even a small life policy (ideally a term pzolicy) will be an added security and assurance for your spouse. Don’t ignore this factor!
Try to look at alternate sources of income post-retirement..
Most of us tend to think of retirement as the end of our working careers. That is not necessary any longer. At the age of 58 or 60 you still have another 10 years of active working life left in you. Of course, you may not be comfortable in a full-time job or a job that entails too much of travelling. But the skills you have acquired over the years can surely offer you an alternate career. Talk to your bosses and your company promoters. Most of them will be more than keen to utilize your experience in some way or the other. You can also freelance for websites and other newspapers that are always on the lookout for quality content. There are advisory positions and roles that you can assume. In a nutshell, there are a plethora of options in front of you. This extra income can help you pursue your other hobbies, travel to destinations of your choice, gifting to your loved ones etc without compromising your core retirement corpus.
Remember, retirement planning is unique in many ways. You are betting your entire future on it. The better you prepare and plan for it, the more successful you are likely to be!