This guest post is written by Vivek Shah
Who doesn’t want to retire with Ease and Comfort after the hardships of 1st Innings!!!
Retirement is one of the most important phases in a person’s life. It marks a tectonic shift from active income to passive income. The amount of savings and investments done during the youth and the middle age will determine the quality of a good 2nd innings. Many people think that whatever they have saved will be enough for their sunset years without accounting for the monster called inflation.
Unfortunately retirement planning generally comes last in all the financial goals of most Indians. Most of the people generally save for a dream house or a dream car they want to purchase or for exotic vacations. If a person were to start investing at the age of 30, with a sum of Rs 10000 per month and if it were to grow at 12% per annum, he would have an accumulated corpus of Rs 6.5 crores at the age of 65. However if the same person were to start at the age of 35, then he would accumulate just 3.5 crores. Thus it’s a whopping difference of Rs 3 crores. Hence the earlier one starts, the more he can accumulate.
The 5 financial beliefs of wise retirement planning are as follows:-
- Your expenses will not halve when you retire– A lot of people forget to factor in the healthcare expenses that balloon during old age. Life expectancy of an individual has gone up from 70 Years to 80 years. Moreover inflation points out that the cost of goods and price will keep moving up.
- You could live much longer than you think– Living too long is another problem that happens if one is not financially secure. Many people face the problem of depleting resources when it comes to old age since they did not accumulate enough. With the improvement in healthcare, the life expectancy of an individual has gone up. One could easily ensure at least 20 years post retirement.
- Buying a pension plan is not enough, your retirement plan needs to be your own plan– A lot of advertisements talk about retirement with pension income. One needs to factor in inflation when assessing the expenses which would start arbitrarily without any income in the old age. A corpus needs to be accumulated from which atleast 8% to 10% can be withdrawn per year equated on a monthly basis. This accumulated amount should be invested in a product which gives more than double digit returns per year so that it does not get depleted due to systematic withdrawals. A periodic Systematic Investment Plan would help in achieving the goal of meeting monthly expenditure during old age. Mostly the pension plans that are available in the market offer very low returns and moreover the capital amount is either blocked or is only released during death of the holder to the nominee. Commutation is restricted to only a part of the pension corpus.
- Get expert advice– One should take the help of financial planners while planning their retirement. Doing everything by yourself could lead to biased decisions and wrong investments and also investors might tend to squander their money over something which is for temporary gratification and the one which will not be useful for their planned long term goal. One could also study online about wealth management if one has difficulty finding the right financial advisor. One needs to follow the right asset allocation in order to achieve actual financial freedom. This only an expert would be able to guide to.
- Invest and shop smartly– It is extremely easy to spend frivolously as soon as one gets his salary paycheck on the latest gadgets and the fancy stuff. Any person who has acquired great wealth has done so by investing 1st and then spending whatever is left after savings. Investing leftover after spending is an incorrect method of financial planning. As soon as one gets his pay, it is prudent to allocate a percentage towards investment. Compounding plays a major role in wealth creation and it all depends on how much one invests and not splurge unnecessarily on the latest fads available in the market. This would ensure financial peace.
Why do we need to plan Retirement Early?
77% Indians do not save for retirement, most of the people depend on their children for support. The youth of the country does not save much; they tend to be spendthrift with their credit cards and hence are not focussed on retirement kitty. Considering that the Government in India does not provide retirement benefits like some of the countries in the Western world do, it is imperative to take financial planning seriously. With so much of information available online, one needs to start saving smartly. The investments should be in an asset class which beats inflation handsomely and thus equities and mutual funds happen to be the best avenues.
For people who are slightly risk averse, mutual funds are a better bet compared to direct equity. A decent life cover needs to be taken (atleast 10 times of annual income) and a comprehensive health cover also needs to be taken. These will be like a financial umbrella for one’s retirement corpus. A lot of times people do not take adequate health insurance and life insurance and in case of any unforeseen circumstance stand to lose out big on their investments. Thus rightly said —
“Retirement is supposed to be the great escape from the stresses inherent in most jobs, a time to experience a fulfilling life derived from many enjoyable and rewarding activities.”Ernie J. Zelinski, The Joy of Not Working.