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Retirement planning is the process of planning for future life and the actions and decisions taken to achieve a steady income. This involves setting the retirement goals, estimating the money required during the retirement phase, and investing to make the money grow.
Retirement planning is for a period when a person will leave his job or a source of steady income. It includes keeping aside enough money to be available during retirement and is best when a person starts saving and investing at an early age. This will reduce the financial worries during retirement and makes it secure. During retirement you go from accumulation to distribution phase i.e. you are no longer earning but your savings are paying for your expenses.
Importance of retirement planning-
Retirement planning is important due to the ever-increasing inflation and people not having enough money in the future which leads to stress. Medical bills often increase in old age. The reason why retirement planning is important is :
- A few decades back there was joint family system which ensured that the senior citizens were taken care of by the younger members of the family. For generations the elders depended on their children for financial support in their old age. But the times have changed and the youngsters prefer to lead an independent life. Even the older people prefer to be independent nowadays. It is possible to be independent by the age of 50 years if you plan properly for retirement without any joint family support like the past.
- The healthcare costs are ever increasing. With the increasing age, as you grow older the expenses on health related issue keep on increasing. If you have not saved enough, it becomes difficult for maintaining expenses for health and well-being.
- Not only the medical bills but the costs of basic necessities are ever rising due to inflation. Your standard of living can get compromised if you are not able to keep up with the rising costs.
- The social security system in India is weak. There are employee provident funds but that too for people only in service. It becomes all the more important to build a retirement corpus consisting of debt and equity or mutual funds because if you run out of money there is no support system from the government.
- If you have enough money and plan wisely you can have a good life and carry out your hobbies without any stress. You may even wish to travel and explore new places. This could be the beginning of a new life for you.
- The average life expectancy of people has increased in India as compared to a few decades back. You may have a long life ahead after retirement. So you must plan accordingly.
- When you have saved enough wealth you can live comfortable life after retirement and leave a legacy for your family members.
How to carry out retirement planning-
1) Decide what age you wish to retire-
The normal age for retirement is 60 years but some may wish to retire by 55 years and some even by 50 years. You have to decide the retirement age as after this age your income will stop and you will have to be dependent on your savings and investments. If the average life expectancy is 75 years then you will have to live for 15 years on your investments and if you retire at 55 years you will be without income for 20 years of your life. It is possible that you may even live beyond the age of 75 years. So take into account all these considerations.
2) Maintain budget-
You will be aware of your current expenses. If you are not sure, start keeping a record and see where the money is going. This way you would know how much expense you are having every month. Keep a record of all your utility bills, grocery bills, credit card expenses, restaurant bills, and all the other expenses and you will know how much you spend every month. With increasing inflation, you will need a lot more money when you retire compared to the present. Knowing all the expenses is a good way to start with retirement planning.
3) Start the process early-
Start the planning early at a young age, as you will have several years in hand for saving and investment, and with it will come the effect of the power of compounding.
When people start their jobs they think that retirement is decades away so why take the tension of planning. But this is not the right attitude and if you don’t have enough money in your retirement years you will have to depend on your children.
If you start early you will be able to save a sizable amount of money which you can plan and invest. This will bring you peace of mind as you will know that you have enough money for survival after retirement.
4) Identify how much risk you can take.
Identify the risk you can take. Are you comfortable investing a large part of your money in equities or do you prefer debt instruments with a low steady income? The risk appetite plays an important part in retirement planning.
5) How much retirement corpus would be ideal?
Retirement corpus is the amount of money you need after retirement that can meet your present lifestyle expenses. As discussed write down all the expenses every month and track the expenses for a year. This will give you an idea of how much you spend every year and then take inflation into consideration and calculate the money you will require post-retirement. You can take the help of your financial planner to help you invest in each asset class and bring a disciplined approach to your investments.
6) Reduce unnecessary expenses-
The budget that you prepare every month will bring forth the unnecessary expenses that you are making. As you are aware of the target; you can cut down on all the unnecessary expenses, be it entertainment or the purchases that are not required. This will lead more of your money towards investments.
7) Retire debt-
It is good not to have any loans or debt near your retirement age. The loans should be cleared off before retirement so as not to give you any stress.
8) Invest within limits-
Once you have started saving for retirement and investing check the schemes and do a risk assessment. It is no use putting in schemes that offer lucrative returns and there is no safety of your money. This way you will lose money and will be pushed back from your goals. Invest sensibly and try to reach your goals.
9) Track and review your plans
Monitor your plan and check the results every year. Any changes in expenses or income should be considered and changes made in the plan to reach your goals in the changing market scenario.
Other things to consider in retirement planning-
- One of the biggest investments with persons in their life is their home. You will have strong emotional feeling for your home as you would have stayed there for a number of years and raised your children. If it is big, there would be larger expenses involved. Once your children have moved out you can consider moving to a smaller house.
- With age the medical expenses will increase. You should have adequate med claim policy going in to your retirement years.
- Consider investing taking into account the tax considerations and if required take the help of your financial planner.
Benefits of retirement planning–
There are many benefits of retirement planning. Some of them are-
- Stress in life minimalized-
A person who doesn’t have a regular income in his retirement years is full of stress. Everyone requires money till the end of life to manage their needs. Having enough money relieves a person from most of the stress.
- Money is working for you-
When you are young you have all the energy in the world to work the whole day. There are people who commute daily for two hours either way to their jobs. But once you are old the energy level recedes and this is the time when you should relax and let the money work for you. The remaining life you should be able to enjoy with your children and grandchildren without being dependent on them for monetary benefits. The retirement fund should be able to generate all the required money.
- Tax benefits-
When you save for retirement you invest in PPF and NSC that qualify for tax exemptions under section 80C of the Income Tax Act. This helps in tax saving.
- Good returns –
When you have proper planning you can try to generate inflation-beating returns. Investing in FD will not give much return. Starting from an early age the investments will help in compounding your wealth.
Retirement planning helps us to lead a stress-free life. The money part is taken care of and investing for the long term helps in achieving the power of compounding along with the required tax saving. You need not be dependent on your children for basic financial requirements and pursue the hobbies that you wished to carry out all through your life.