The Importance of Retirement Planning

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With technology bettering health care people are living longer. It means that every individual should mandatorily look into investing in their future. Unfortunately, in India, the everyday citizen is still not mindful of how to plan for their retirement reliably. This post helps emphasise the vital need for it.

Chalking out a reliable retirement plan is challenging because there is so much we must assume. From your own lifespan and when you will retire to how inflation will affect your corpus over two or three decades and how the stock market will perform over time. All of it must be assumed. Therefore, the figures you arrive at might seem meaningless, which is perhaps why just 2% of Indians have put a plan to paper (Aegon Religare Retirement Readiness Survey, 2014). But neglecting to plan altogether is dangerous. In fact, the large corpus you require to sustain your lifestyle during retirement is precisely the reason you need to plan early. Let’s see how you could go about it all:

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1. Making assumptions
Even while making assumptions, it is useful to work with available data to guide us toward a sensible plan. So, when deciding how many years you need the corpus to last you, know that, as per the OASIS report, life expectancy in India is expected to reach 80 by 2040, as compared to around 66 years in 2012. As lifespans tend to be longer for those with access to better healthcare, city dwellers could live well past this age, too. If you’re among the 80% of Indians who view 60 as retirement age, you have 20 or more years to save up for. At the same time, just 13% of the country’s workforce enjoys a pension – and it’s unlikely that this number will improve in future. What this means is that, Indians, now more than before, need to have a retirement plan. So no matter how young you are, it is important that you save up for when you will no longer have an income.

How to prepare: Estimate needs
In the above calculation, we have made a simple estimation of how large your retirement fund needs to be, if you are currently 30 years old, expect to retire at 60 and currently spend Rs25,000 a month. The final number, of almost Rs6 crore, is scary, but if inflation remains as high as it has been over the past 60 years, this is how your expenses will rise. This high – and rising – cost of living is viewed as a financial risk by 58% of Indians surveyed in the Black India Investor Pulse 2014.

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2. Unstructured plans
Early on in life, when retirement planning should ideally begin, there are too many competing goals vying for your attention. There’s the home loan, school fees, house expenses, children’s wedding, etc. Ultimately, whatever is leftover is seen as a retirement fund. This is exactly how we end up underestimating our needs. A 2015 report from HSBC found that 47% of Indian retirees regret not having started investing earlier. Only when you put everything down on paper can you figure out exactly what you’ll need. You may, for example, realize that your children’s education should be funded by a loan or that wedding expenses need to be lowered if you are to meet your retirement goals.

How to prepare: Disciplined investment
Consider strongly all that you will need when you retire and how you can afford to achieve it. Based on this, a plan needs to be created. An ideal way to begin is deciding on an asset allocation that works for you, according to your risk appetite. Generally, if you start investing when you’re younger, you can allocate a much larger portion to riskier equity mutual funds, while smaller amounts could form part of a debt portfolio. For the plan to work, you need discipline in investment. So ensure that you don’t put off these decisions – act immediately.

2. Inflation Rages On
Lately, there has been talk of inflation cooling, but it continues to affect India quite severely. The rate of inflation for India, since 1953, has, in fact, been around 6.9%; however, if you live in urban India, it is likely to have been higher. If you were to apply an inflation rate of, say, 7% per annum over a long period of time, you will find the results quite scary. For example, if you spend Rs25,000 a month at 30, you’ll need around Rs1.9 lakh a month at 60, unless you seriously curtail your expenses. If you find these figures unbelievable, consider what your parents’ expenses were two decades ago, as compared to today.

How to prepare: Look for opportunities
Aside from regular investment, also look for investment opportunities for when you receive lump-sum, from, say, an annual bonus or perhaps on getting married. See if it is feasible to lock these amounts into an equity mutual fund for the long term. Also don’t forget the Public Provident Fund, a good debt and tax-saving investment.

3. Longer life to all
The wonders of modern medicine has, on average, brought us longer life. Now there’s no way of knowing how long you or your spouse has to live, but you will need to plan for a certain time frame anyway. Please do not forget to factor in health expenses. This would include health insurance as well as those expenses that your policy will not cover. In fact, you should get a health plan right away even if you’re already covered by your employer. Medical expenses could easily set you back on your retirement plan. According to a 2011 report in the Lancet, Indians pay for 78% of health expenses from their own pocket.

How to prepare: Maintain an emergency fund
This applies not just to your retirement years, but any stage of your life. An emergency fund is essential, for a situation may arise where the amount you have in your account is not enough to pay for an emergency. Depending on how easy it is for you to unlock your other funds, it is recommended that you leave anywhere from three to nine months’ expenses in an emergency fund.

4. Avoid silly investments
With agents and now even bank representatives constantly recommending ways to invest your money, you could easily be misled into a poor investment, such as a ULIP. Such mistakes could easily steer you off the path to fulfilling your retirement dream. Even those with sufficient knowledge of the subject often fail to critically examine a scheme. Sometimes it is for lack of time, at other times it is because of emotional biases. But creating a retirement plan is not simply about avoiding mistakes; it is an elaborate plan to constantly be reviewed.

How to prepare: Consider getting help
Even if you have a good understanding of personal finance, it is a good idea to consult the help of experts to track your situation on a continuous basis, rather than you attending to your financial affairs sporadically. Do consider whether you need to get a comprehensive financial plan for you and your family from a certified financial planner.

In summary, a person should not make assumptions but estimates. They should avoid unstructured plans and make a disciplined investment. Since inflation keeps raging on, look for opportunities of investment at all times. Maintain an emergency fund and get professional help to circumvent silly and loss-filled investments.

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