Planning for Retirement? Calculate Corpus needed to support your expenses
Retirement Planning has been gaining a lot of importance of late in India. Importance is more in financial magazines than among those who need it the most. As part of a financial plan, retirement planning in India could be significantly important in the coming 2-3 decades. Till a decade ago, retirement meant receiving pensions, purchasing a house to live in and going on vacations randomly. Retirement was a peaceful phase and no such planning was needed for it. Investments produced high returns with decent safety.
However, the world has changed. Recessions, political uncertainties have increased leading to an everlasting situation called “Uncertainty”. Let me not go deep into these macro and micro economic view points. What it does mean for a middle class person is to be extra careful with his money and start thinking about a future phase called Retirement.
Why Retirement Planning?
Increase in Life Expectancy
According to estimates, current average life expectancy in India is around 67 years, with women living 3 years more than men. In retirement terminology, this is also called fear of living long. In case you are thinking you would live only for 70 years or so, you would have to think again. Longer life means more expenses incurred, which means more income is needed to suffice it. Life expectancy could be 80-85 in the coming years, considering the advances in medical technologies.
Inflation has been a monster and could continue to be the one which kills your income. Inflation is digging a deeper and deeper hole in the common man’s pocket. It means you would need more and more income for your living expenses post retirement. Planning for your retirement by taking inflation into account would make life a lot easier for you when the time arrives.
Defined Benefit to Defined Contribution
There is nothing called guarantee in this world. If you are a govt. employee, you would know this even better now. The days when there were defined benefit schemes for the govt. employees which give them guaranteed lump sum / pension are by far gone. They had to shift to defined contribution schemes, which put them on par with their private counter parts. A lot of countries are moving to defined contribution schemes due to lack of affordability. Hence, never trust the social security system of the country and have a plan for yourself in place.
Volatility in Returns
If you have invested in any kind of financial instrument in 2007-08 and stayed till date, you would seen the best and the worst of returns. The past 5 years has been a roller coaster ride in not just the Indian market, but also the global markets as well. Even the debt market has turned upside down due to tinkering of interest rates. This uncertainty in returns of various products is expected to continue further. Hence, there is no particular instrument which guarantees you safety with returns. In such circumstances, lack of a retirement plan in place could be fatal to your finances.
Rising Health Care Costs
With rising medical advancements, cost of medical treatment has increases many a fold. Medical inflation is rising at 7-8% p.a in India. If you lack a proper health insurance policy, god save you post retirement. Of late, a lot of private employers have started providing medical insurance to their employees to a certain extent. This may not be sufficient for you and even if it is, there is no certainty that you would be in this job forever. Moreover, a personal health insurance policy would be useful for you especially post retirement, since that would be the stage when you need it the most. Expenses may be much than your expectations since your policy may not cover everything. Hence, it is all the more important to have a proper retirement plan with these costs included.
Retirement is not just about sitting on a couch and watching ‘Bhakti’ channels. You may have your own goals such as going on a vacation, buying your long cherished dream home, gifts to loved ones, etc. If you want these to be a reality, then you would have to start planning for them right now.
Now that we have enough reasons to know why to start planning for retirement, we now have to know when to start planning for it and ideal age to retire.
Ideal Age to Start Retirement Planning
Ideal age to start planning for retirement would be 1-2 year after you have joined your first job in hand. This means you have ample time for your retirement and thereby giving you the chance of modifying your goals or adding to them as per the rise in income. If you have not started yet, the latest time to start planning for retirement is NOW.
Ideal Age to Retire
Current retirement age for government employees is 60. There are speculations of bringing 62 years as retirement age. There is no specific age for private employees, though. They would be in a dilemma as to when to retire. If you have a retirement plan in place, you could make a decision on it. Sometimes, when your retirement corpus may not last long, you may have to work longer. However, if things are in place, you may even plan for an early retirement. Only numbers can decide when you can retire.
We now know why and when of retirement planning. The final point would be HOW.
How to Plan for Retirement?
Products Available for Retirement
- EPF – Employee Provident Fund (EPF) was and is one of the major investment products aimed at retirement. For most of you, a part of salary would be deducted as part of contribution towards EPF (around 12%) and employer would also add a similar amount to your account. This is almost a forced saving. This will help you build decent corpus needed for your post retirement years. EPF yields up to 8.5% p.a and is subject to change yearly.
- NPS – New Pension Scheme (NPS) is a wonderful scheme initiated by the government few years back. It is considered to be the cheapest investment product for retirement available in the market. What excites more is the fact that it also invests a part of the savings in equities depending on the age and plan chosen. It is not just restricted to govt. employees, but also open to private employees and self employed throughout India. NPS is a great product for retirement. However, it might not give you the flexibility of frequent withdrawals, which is good in the long term.
- Mutual Fund Retirement Plans – Mutual funds have multiple plans for both building a corpus as well as investing the corpus accordingly. Charges involved are also not high. However, choosing such plans needs a bit of financial knowledge since only past performance may not help you choose the best.
- Insurance Companies Retirement Plans – Like mutual funds, insurance companies also provide different variations of retirement plans. However, there may be charges up to 5-6% or even more on these in the name of premium allocation or policy administration.
When it comes to planning for any goal including retirement, asset allocation is the key to reaching it. According to various sources, 85-90% of the returns from a portfolio are due to asset allocation. Asset allocation is nothing but deciding how much needs to be put into each financial product. This is definitely the toughest thing to do. A thumb rule is that (100 – age) % should be invested in equities and rest in debt products.
How to Calculate Retirement Corpus / Pension?
While planning for retirement, two things will trouble you the most – Retirement Corpus needed and Pension which gets generated from this. There are various financial tools and calculators available in order to calculate these. InvestmentYogi provides simple but efficient Retirement Corpus and Pension Calculators.
Having known about various aspects of retirement such as retirement products, need for a retirement plan, only question left out is – who would do it?
Financial Planner versus Self
A qualified and capable Financial Planner such as a CFP could be very handy for you in preparing a retirement plan as part of an overall Financial Plan. However, there is no such mandate on approaching a financial planner for this purpose. You can trust yourself too. You would have to build your financial knowledge for this and of course, allocate some time for your finances on a regular basis.
Word of Caution
Beware of advisors who act as planners, but only sell retirement products for commissions. Start early and retire rich. Have a great Retirement Life!!!
About the Author
A.V.Suresh is our in-house Financial Planner and a personal finance enthusiast. He is a Certified Financial Planner(CFP) and also has an MBA in Finance. He can be reached at firstname.lastname@example.org