Why & How much you should save for retirement?

I get many queries on how much to have as retirement corpus and what can be the withdrawal rate every year.

I come across instances where people are losing jobs in their mid forties and this is the question in top of their minds.

Let us say you are 50 years of age and need Rs.1 lakh every month for your expenses.

Having worked for 25 years, let us assume (hope!), you’ve repaid home loan and has made enough provision for your kids higher education and marriage. You also have sufficient medical cover and an emergency fund equivalent to 2 years of expenses.

The retirement corpus you aim for need to provide you an income of Rs.12 lakh per annum. What would be the corpus? I would suggest you need at least Rs.2 crores. Having a life expectancy of 80 years, for both you and your spouse, this corpus can be deployed in balanced funds (equity oriented hybrid funds, 65% in equity and 35% in debt). I assume balanced funds are capable of providing 12% returns over next one decade.

If we keep the withdrawal rate at 6%, you would get Rs.1 lakh per month. Why I’m keeping the withdrawal rate at 6%. The inflation is around 6%. So you get a real return of only 6%. If you withdraw more than the real rate, then your capital would start eroding. As capital erodes, your purchasing power would go down. This would affect your quality of living. So you should only withdraw the real rate of return. This would ensure that if both of you or one of you happen to live till 90 or more, still you’ve comfortable money.

If withdrawals include part of capital, at some point you may run out if it, especially if you live long. Not only that many want to leave some assets for the subsequent generations as well. Also it is difficult to even assume what return we would get beyond 10 years. There can be some major emergencies as well. Keeping all these in mind, it is never wise to withdraw part of capital. You should withdraw only real returns.

This also means that if you go for fixed deposits (other than for emergency fund and near term goals), your real returns would almost be zero. So to preserve your purchasing power, you cannot make any withdrawals! This is an impossible situation.So some amount of risk taking is essential unless you’ve tens of crores. Balanced funds are a better option as we are looking at the retirement life which can even be longer than our career span.

If we apply this strict yardstick, most of us are not ready to retire. So please try to develop your knowledge and skills and be employable till you achieve the goals. Early retirement is not easy. It may be possible if you drastically cut down your life style. Since most of us do not prefer this, the only way is to keep developing skills which can be monetised and thereby enhancing the means.

Early retirement is not easy. I’ll let you know when you’re ready.

What comes to your mind as soon as you hear the word “RETIREMENT”? Is it holidays, a bungalow, chasing your dreams, relaxing, playing with grandchildren, etc.?

Does the picture of a very old man walking with a stick come to your mind along with the picture of rising medical bills and worried children? After toiling and sweating for years, everyone wants his or her retirement days to be relaxed and enjoyable. Sadly though, almost 13% of Indians feel that they can never retire and need to continue earning till the last day of their lives. This however, can be avoided with just a little bit of planning. All you have to do is look ahead and plan your retirement. Investing your money wisely and early are the key components to ensure a happy and stress-free retired life.

What is Retirement?

Retirement does not mean you need to stop all your daily activities and expect to be spoon-fed. It is that time when you are at the peak of your performance and have chosen a date when you will stop worrying about being ‘Employed’. You may choose an alternate profession post-Retirement as well. Cricketers retire well before 40, but does that mean they stop working or living? They just ‘Retire’ from Cricket! They may continue to work as a commentator, comedian oreven choose to open his own Business! But for a service or businessperson, ‘Retirement’ means that he stops earning the maximum chunk of his money and accepts a certain way of life.

Thus, Retirement is a Mindset! It is a stage when you stop expecting yourself to out-perform your own expectations!

What is Retirement Planning?

Financial Planning for the period when you might not be actively involved in earning money for your living is called Retirement Planning.

There are some very Basic Steps for Retirement Planning:

Mindset towards retirement

Everyone has to retire someday and so it makes sense to start saving. A recent Max Life –Nielsen Survey found that while 72% of Indians already started investing for retirement, only 37% felt that they’ll have a sufficient retirement fund. This is a worrying fact and the only way to escape an insufficient fund is to start saving early. Most people make the mistake of starting to save only at the age of 45 or 50. Avoid this mistake and begin early.Start your retirement fund while in your twenties or thirties. This will give you ample time to save and build a healthy retirement fund.

The importance of retirement planning

Since people start their families at a later age nowadays. Financial responsibilities, such as paying for a child’s education and marriage, continue well into the retirement years. It was seen that 50% of the people residing in western India needed to complete such duties after they retired. Therefore, planning for retirement is of utmost importance. According to the survey, 20% of Indians say they won't stay with their children after retirement. This makes the situation ever trickier and financially more challenging. Now since health deteriorates with age, you need to have a contingency fund for your health post-retirement. Keeping all this is mind, retirement planning becomes very important.

Ways to plan your retirement

First and foremost, you need to consult a professional for this. 32% of Indians do not speak to professionals and therefore, end up taking incorrect decisions even in today’s progressive world. 

Therefore, if you really want to be wise with your money, Seek Professional Help.

One needs to have a properly planned Asset Allocation for his entire portfolio before investing so that his investments are in sync with his risk appetite and time horizon.

There are some good investment tools such as retirement insurance plans and government savings schemes such as the NPS (National Pension Scheme). The survey said that a majority of the people (79%) depended on insurance policies as a retirement investment tool. There are some very good retirement plans such as LIC’s Jeevan Nidhi, ICICI PRU Easy Retirement, SBI Life’s Saral Pension Plan and Empower Pension Plan from Birla Sun Life Insurance.

Each Plan should have a Product Mix for the Ideal Combination. You should preferably have a couple of products such as:

• Long Term Mutual Funds, whether in Debt, MIP or Equity would depend upon your risk appetite.
• Pension Plan could be either a Government Provided Facility in NPS or Self Provided such as LIC’s Jeevan Nidhi, ICICI PRU Easy Retirement, SBI Life’s Saral Pension Plan and Empower Pension Plan from Birla Sun Life Insurance.
• Real Estate Investment is a good Retirement Asset, which increases with time but has high liquidity concerns.
• Bank Fixed Deposits, Post Office MIS and other Debt Instruments for short term exigencies and regular inflow of money in a steady manner, which is not involved with the volatility of the market but taxation aspect needs to be considered before investing.

How to start?  The key is : Get started today

65% of the people in India feel that they have not started saving early enough and feel they’ll have an insufficient retirement corpus. Do not make a similar mistake and start saving today. If you start early, you can put in small amounts into the fund without taxing your finances too much and still have a very healthy fund when you turn 60. Speak to your financial advisor or your insurance agent and learn about the best available savings tools. Save today and smile tomorrow!