It was only yesterday that we were born. And it is only tomorrow that we will retire. That’s right - time flies swiftly, and all that we can do, like always, is plan and act responsibly in the present in order to minimize unwanted financial contingencies in the future. Meaning, retirement planning is of utmost importance, and you should start doing it right away, for your golden years will come even before you realise. Moreover, retirement planning in India is no easy job owing to rising inflation, love for gold and too many financial products offered by banks and other financial institutions.
What is retirement planning?
Retirement is an important phase in our lives that we all are likely to experience in the future. And retirement planning is a crucial process that we must undertake now, because it takes planning and unhindered diligence until the day you retire. However, in contrary to popular belief, retirement planning can be done with lesser compromises if you do your homework, set an achievable target with the help of a sound investment plan, and persistence.
Why is retirement planning necessary?
You have as much responsibility towards your own well-being as towards your loved ones’. Which is why, it is necessary that you know of all the possible sources of retirement income, and what could happen in their absence.
Pension benefits – it is the most commonly granted benefit for retired individuals by a government. Now, with advances in health care, more retired citizens are living longer than before, thus putting pressure on the financial system of the country. Also, pension plans offered by various private institutions may get affected if the issuing institution collapses. All of the above makes it all the more important for you to take your retirement plan in your own hands.
Unanticipated medical expenses – old age is riddled with medical emergencies. Without adequate monies set aside for such times, living a comfortable retired life and covering medical expenses at the same time can be tricky and burdening. Which is why, it is necessary to invest in a sound healthcare insurance that covers your expenses whenever required.
Asset planning - in the absence of funds, you may be forced to liquidate your assets for the purpose of covering your expenses during your retirement years. This could prevent your loved ones from inheriting your financial legacy, or turn you into a financial burden on them.
And above all, retirement planning should be done with a keen eye on inflation, since it is the single most important factor that affects everybody’s savings.
How much money you will need?
There is no sure-shot formula for arriving at the right sum needed for a comfortable retired life. However, there are few key factors that a retirement calculator takes into consideration for the purpose of arriving at a sum. They are:
Your current monthly expenses
Your present age
Your retirement age
Monthly investment towards retirement
Building a nest egg
Now there are several sources that provide monies for retirement savings. All of these are instrumental in building a nest egg – the sum of money saved for the future. Now retirement has two phases – accumulation and distribution.
The accumulation phase is when you accumulate the amount required for your retired life. You start building your savings with employment income, which is probably the largest contributor to your retirement fund. Just deduct your annual living expenses from your after-tax annual income, and whatever that’s left extra can go towards your retirement planning. There are various investment instruments that you can turn to – New Pension Scheme or NPS with tax benefit under section 80C, Employee’s Provident Fund of EPF with deduction up to 1 lac limit under section 80C, equities like stocks and mutual funds investment that are tax free after 1 year of investment, Exchange Traded Funds or ETFs, Bonds etc.
Now, the distribution phase is when the accumulated sum is returned to you during retired life. There are several investment instruments that you can opt for during this phase – monthly income schemes or MIS from post office, Senior Citizens Saving Scheme (SCSS), reverse mortgage that lets senior citizens pledge their house with a bank in exchange for income for a set period of time, pension plans, FDs etc.
You must bear in mind that every penny should be invested wisely. As cliché as it may sound, but never put all your eggs in one basket. Diversify your investments, and bear in mind tax implications and compounding.
It is wise to start saving for retirement and take advantage of tax-sheltering opportunities. However, if you are a little late in saving for your retirement, don't fret. First, zero down on a budget for your current expenses so that you can ramp up your savings for a retired life. Or consider taking up a second job now to boost your financial situation. Part-time jobs during retirement, though a tedious option, can help you catch up. And lastly, your home may be a source of funding for your retirement. You can either rent out a part of it for monthly income, or reverse mortgage it with a bank for a stipulated period of time for tax-free income.
In conclusion, while building a nest egg for the golden years can seem like a daunting task, a solid investment plan and unflinching commitment towards that plan will guarantee a comfortable lifestyle (if not the best) that you can lead during your old age. And remember – the sooner you start planning and executing, the better.
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