Retirement Planning

You can be better prepared to handle the period after you have stopped your professional career, if you start your retirement planning early enough.

 

Retirement planning prepares a person for life after paid work ends, not just financially but in all aspects of life. Except pension for government employees, we do not have robust social security system like developed nations. Therefore, planning for retirement is extremely important for secure retirement life. But, planning for a financially secure retirement can be overwhelming and confusing because it changes throughout different life stages. One of the most challenging aspects of creating a comprehensive retirement plan is striking a balance between realistic return expectations and a desired standard of living. Below are a few important tips for financial planning for retirement.

Start small

People often ignore the power of regular small saving in the bank. In many instances, we believe that the small investments or saving in banks are not going to do much for our future. When we are trying to establish ourselves in a career during our twenties and thirties, we may not have long-term goals, but that should not make us discard the savings process. We need to realize that along with our lifestyle expense, the savings can also go hand-in-hand. The 'investing can wait' attitude needs to be overcome to take the maximum benefit of compounding effect. Small amount a month will convert into larger saving when we accumulate it in yearly basis due to the compound interest. Therefore, we should make a habit of depositing even a small amount in banks.  

 

Forced and voluntary savings

For salaried individuals, the monthly contribution toward the Employee’s Provident Fund (EPF) remains the only forced savings mechanism. Every month, 10% of our basic salary, along with a matching contribution by the employer, flows into the EPF account. While a certain degree of flexibility can be a relief in a genuine crisis, experts say we should not touch the EPF money until retirement. The essence of the EPF lies in letting compounding work its magic. The corpus, if allowed to build up with incremental contributions each year, can reap huge benefits in the long run. For instance, an individual with a basic salary of Rs 15,000 and 30 years left for retirement can attain a corpus of Rs 60.75 lakh at the age of 58, assuming a 5% yearly rise.
 

In addition, we also have an option of voluntary retirement scheme in Citizen Investment Trust. This scheme is based on Defined Contributory Fully Funded and Individual Account Based System. Participant under this scheme can enjoy the privilege of tax deduction facility upto the limit of contribution made or 33 percent of total remuneration in retirement schemes. Therefore, depending upon our circumstances, we should start contributing to CIT even with a very small amount.

 

Life insurance

Life insurance is another good option for us for retirement planning. The obvious and most important benefit of insurance is not only the payment of losses but also the fund that we receive at the time of maturity or some unfortunate event. The premium payment is actually a forced saving, the benefit of which we will receive after we retire. Insurance companies in the country are offering different life insurance schemes. We need to select the scheme that suits our goals and circumstances.

 

Investment in Capital Market

From the perspective of investment, there are mainly three stages for retirement planning i.e. accumulating, consolidating and spending. Typically strategies change during an individual’s lifetime. In the accumulating phase (20 years to 40 years of age), the individual is accumulating net worth to satisfy short-term needs (e.g., house and car purchases) and long-term goals (e.g., retirement and children's college needs).

This is the most important phase for retirement planning. In this phase, the individual is willing to invest in moderately high-risk investments in order to achieve above-average rates of return. During the accumulation phase, substantial portion of savings (around 50% to 60%) can be invested in stocks for the long time depending upon the level of risk and income/savings. It may be a good idea to invest in different sectors to minimize the risk. Investing saving entirely in the stock market runs the risk of losing significant amounts of money.  While investing in a stock market, we need to understand that we are investing for the long period of time and therefore, we should stay away from the speculative investment. Most importantly, if we are not sure what to do with our money, park it in a safe investment like gold, fixed deposit, treasury bonds while we take the time to make an educated decision. It is advisable to take help from the professional fund managers for our investment decision for our retirement

Conclusion

The most important part of any savings or retirement plan is simply to start. There is no one right way to save money, nor one right way to invest. What is important is that we keep saving, learning, and looking to build wealth for the future. If we establish the habit of saving money every month, take the time to place our money wisely, and patiently allow our wealth to build, we will be taking huge steps forward in making our financial future more secure. The best solution is to focus on creating a flexible and diversified portfolio that can be updated regularly to reflect changing market conditions and retirement objectives.