In this episode of Dhan ki Baat, Apoorva Tiwari, Chief Operating Officer at IIFL Holdings, discusses how to plan for expenses after your retirement.
Retirement planning is one of the most crucial aspects of sound financial planning. Planning for retirement should begin early and you must set aside funds and invest regularly to build a corpus to ensure a comfortable retired life. For this, you should invest in policies and schemes that lead to saving more for retirement. The more money you save, the better it is as this would cover all of your future expenses, especially when you won't have a regular source of income.
1. Accumulation: The stage where you can accumulate or save as much money as you can for your future years. The accumulation stage comprises of:
Your early education years
Early career phase
The years of raising your children
Till your children move out
A person who has successfully saved money through all these phases is more likely to achieve his/her financial goals.
2. Allocation: Simply saving a part of your income isn’t enough. You need to invest your hard earned money in high return assets to ensure that you have enough for the future, especially since prices in the coming years will surely be higher. Hence, you must ensure that your investments give you a good return. Further, you may consider investing in assets that will give you high returns, while the remaining money can be invested in slightly risky instruments, in order to open the high risk-high return possibility.
3. Distribution: By the time you reach this stage, you have retired and are collecting money from the channels you set up during the accumulation phase. The success of the distribution stage depends on how well you managed the accumulation stage.
Understand expenses: Take a thorough look at your current spendings and identify the expenses necessary for the normal functionig of your house. You should also figure out other expenses that can be avoided or cut down (discretionary expenses). Apart from these, determine roughly how much you will need to cover all your future medical expenses so that you can start saving accordingly.
Estimate retirement corpus: One of the main reasons why retirement plans fail is because people underestimate the value of inflation at the time of determining the retirement corpus. Expenses equaling Rs50,000 today would become Rs2.8 lakh in 20 years from now. And if you are looking to save for retirement, it may take crores of rupees to live your life comfortably.
Identify investment avenues: Just saving and piling cash in your savings account won't let you save enough for retirement. You must identify different sources like equity mutual funds, National Pension Scheme, Public Provident Funds etc in which you can invest your savings to increase them by a substantial margin.
Start saving today: The early you start saving, the more money you will have post- retirement. It is never a good idea to postpone savings. It doesn’t matter how little you save in the beginning; it is imperative to start saving today.
|Monthly Savings||Rs. 7,271||Rs. 30,110||Rs. 1,34,660|
|Total Investment||30.5 lakhs||90.3 lakhs||2.4 crores|
As seen above, if you start at the age of 25, with a of merely Rs7,271 per month and a total investment of just Rs30.5 lakh, you can achieve your retirement goal of Rs8.3cr. (The assumed rate of return is 15% per annum). But if you delay it, your monthly and totacontribution would have to be higher to give you the same corpus.
Among the options available in the market, one of the better options where you can invest your money is the National Pension Scheme. It is a scheme backed by the Government for Indian citizens in the age group of 18-60 years. The minimum yearly contribution is Rs6,000, which you can pay in lump sum or installments of Rs500.
NPS offers investors multiple options on where the funds can be invested in - Equity (Class E), Corporate Bonds (Class C) and Government securities (Class G). The auto choice option lets you invest your money in all of the three asset classes in a pre-defined proportion. It automatically reduces the equity exposure as you get closer to your retirement. This helps generate higher returns in the earlier years while reducing volatility near the retirement age and is a recommended option for savers.
While there is no specific interest rate in NPS, when compared to other investment options,current returns have ranged from 10% to 14% depending on the amount of Equity chosen.
|Age||Class E||Class C||Class G|
|Up to 35 years||50%||30%||20%|
|55 years and above||10%||10%||80%|
If you invest in the National Pension Scheme, having a total corpus of Rs8.3cr, you are provided with mandatory annuity of 40%. The tax-free lump sum is 40%, and the taxable lump sum is 20%. It is recommended that you take a lump sum of Rs3.2cr, which will let you get a monthly income of Rs2.28lakh. Avoid the taxable lump sum as far as possible, and use it only if there is an emergency.
Mr. Apoorva Tiwari is the Chief Operating Officer at IIFL Holdings and focuses on strategy and transformation. He has been with the group since 2016. Apoorva is currently aligned with the Retail Broking division in order to bring their FY2020 vision to life. He takes special interest in improving customer experience across the division using a combination of process design and new technologies.Apoorva is an alumnus of IIM Ahmedabad and brings with him a professional experience of over 15 years and has worked with global financial services companies like Morgan Stanley and Deutsche Bank.
Retirement planning is the process investing in different schemes and policies, in order to have an adequate amount of money after your retireto cover your expenses.
Since you wouldn't have a regular source of income after you retire, there is a possibility that you outlive your savings and won't be able to maintain a desired standard of living. By planning for retirement, you can multiply your savings by a significant margin without having to worry about the expenses in your later years.
To make an ideal retirement plan, you must be aware of necessary and avoidable future expenses. Make a list of all of your future expenses, adjust them according to inflation and determine required savings for your retirement. You may then find assets and policies where you can invest and build wealth over time. If you find this process complicated, you can always consult a financial advisor to plan your retirement efficiently.
Let's assume that you want to achieve a retirement goal of Rs 8.3 crores. To get there, if you start at the age of 25, you will only have to save a monthly amount of Rs. 7,271 with a total investment of Rs 30.5 Lakhs to gain Rs 8.3 crores at 15% per annum return. On the other hand, if you start saving from the age of 35 you will have to save a monthly amount of Rs.30,110 with a total investment of 90.3 Lakhs to gain 8.3 crores. If you start at the age of 45, the total investment goes up to Rs 2.4 crore with a monthly savings of Rs. 134,660. As you can see, the early you start the less amount you have to save.
As they say, better late than never. You can and must still plan for your retirement. Some of the factors that you will especially need to focus on are
Cutting down on discretionary expenses to increase current savings.
Invest in options with exposure to equity in order to potentially generate higher returns
Be very disciplined about saving and investing.
Work with a financial advisor to get good advice.
There are multiple options for you to invest your savings. Depending upon your risk profile and risk appetite, you may invest in any of the following
Public Provident Fund: This is suitable for those who want guaranteed returns backed by the Government. The funds are locked in for 5 years and provide tax-free returns at a rate announced by the Government of India. In recent years, the rate has seen a downward trend.
National Pension Scheme: This is suitable for those who are open to some equity investments over the long run to generate potentially higher returns. The funds are locked in till you turn 60 and the returns are linked to the equity and debt markets.
Equity Mutual Funds: This is suitable for those who can take higher risks via equity investments and understand that it comes with potential for interim volatility along with loss of capital. Over the long-run, equities have generally beaten all other classes in the returns generated and should form some part of your portfolio.
National Pension Scheme fits the twin criteria of safety and relatively good returns. It was launched by the government to provide pension to the investors post retirement. Depending on the scheme chosen, new NPS gave a return on 12-14%. It is regulated by the IRDA and has one of the lowest cost structure compared to other funds.
The National Pension Scheme is for Indian citizens in the age group of 18-60 years. Under the scheme, you can open a Tier I account (having tax benefits) or a Tier II account (without tax benefits). You have to contribute a minimum amount of Rs. 6,000 per year which you can pay in lump sum or installments of Rs. 500. After attaining the age of 60, you can withdraw 60% of the amount in lump sum, and the rest is given to you as a regular pension.
While certain schemes such as Public Provident Fund (8.8%) have a fixed interest rate, NPS doesn’t have a specific rate of interest. However, it is often a preferred investment option since when compared to other investment options, it gives higher returns between 12-14% per annum.
The corpus from NPS is invested in three asset classes: Class G (Government securities), Class E (Equity market) and Class C (Fixed income instruments other than Government securities). You can choose the class in which you want to invest in, if not your money is automatically invested in the classes, based on your age.
Out of the 60% lumpsum given at the age of 60, 40% is tax free and the remaining 20% is taxable corpus. The remainder 40% is given regularly to you as annunity. It is recommended that you do not withdraw the taxable 20% unless there is a financial emergency.
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