Planning for retirement:
There is no “perfect retirement corpus” one should aim for, as needs and expectations vary from person to person. There are a few broad steps you can follow to make sure you can have a comfortable retirement. The first step is calculating how much you would require after your retirement.
Calculating your ideal retirement amount
First, you need to calculate your current living expenses on a monthly basis. Remove expenses that will not be there post retirement. The remnant will be expenses that you will incur post retirement.
Inflate that and you will have your monthly expenses post retirement. Once you arrive at the corpus, see how much your existing savings will help meet that corpus.
Ideally, you should have enough corpus to last the period of retirement, with the retirement corpus generating relatively safer returns and inflation eating away at your expenses.
Financial planning to achieve the desired corpus
- Keep a check on your loans: As long as you are paying EMIs, the chances of having enough money for retirement are slim. Focus on creating a debt repayment schedule designed to pay off loans in two to three years. If you need to live frugally, cut back on vacations and other big expenses, and get your spouse to contribute towards the EMIs.
- Take advantage of compounding: Compounding is the process whereby the value of an investment increases because the earnings on an investment (capital gains + interest income) increase with the passage of time. In order to build wealth, you should invest your money. If not invested, the buying power of your money will depreciate overtime. Investing your money will allow it to grow. Most investment vehicles, such as stocks, mutual funds, Public Provident Fund (PPF) offer good returns on your money over long term. These returns allow your money to compound, creating wealth over time and thus paving the way for a healthy retirement nest egg.
- Asset allocation is important: While you are young, you should invest a larger portion of your corpus in equity, which has the potential to grow your wealth at a higher rate than inflation. As you near retirement, it is advisable to shift funds from equity-oriented schemes to debt schemes.
- Buy a good health insurance for you and your family: Medical emergencies are something we can never predict. However, these are expenses we cannot avoid and they tend to balloon which will be disastrous for your financial plans.
- Save rather than spend your windfall: Whenever you receive a raise, increase your contribution to investments. Dedicate at least half, if not more, to your retirement plan.
- Invest in a term plan: Buy a term insurance plan that is at least 30-35 times your present day earning. A life insurance policy is to be taken for protecting one’s life and compensating for the untimely demise of the policy holder. Please note that this is not to be mixed with investment. This is purely a policy to be utilized in case of some unforeseen event.
Common retirement mistakes to avoid :
- Not having a plan in place: A lot of people do not have a post retirement plan in place, and hence miss out on the benefits of compounded interest and investment returns. They do not begin saving for retirement until they are very close to it, thus unable to collect a sizable nest egg. The earliest amount invested have the most time to grow. By putting off saving aggressively for retirement, you're leaving your funds lying idle.
- Reckless spending: This is one of the most obvious mistakes people make in retirement. This comes as a big surprise to many retirees, they spend more, not less, in the first few years after retirement. Whether it means splashing out on that expensive car you have been vying for, traveling to exotic locations, or undertaking a major home renovation, it's easy to spend too much money in retirement.
- Investing savings in the wrong places: People who are afraid of stock market losses, tend to keep too large a percentage of their savings in fixed accounts such as savings and certificates of deposit. Inflation then erodes these savings, so they lose value over time. Others, fearing that they’ve started saving too late in life, take on too much risk, choosing investments that promise a high rate of return but are more volatile – often leading to big losses.
- Underestimating medical expenses: A lot of retirees underestimate the future cost of medical bills. As you grow older, the chances of you encountering some health problem increases. So it is always better to take into account the inflated costs of medical bills while planning for retirement. Another very similar mistake is overestimating medical insurance. Health insurance makes it easier to manage medical costs, but it doesn’t cover all health-related costs.
- Cashing out the pension plan too soon: Your pension benefits usually accumulate the longer they sit in a retirement plan. Some retirees are pressed to withdraw their pension benefits early, for the appeal of investing in higher growth opportunities or for other reasons. Withdrawing from your pension fund early and capping your benefit accumulation is a risky move.