The term “Retirement Planning” has not changed much. The concept is the same, you work, you save and you retire. But due to changes in circumstances, the savers today are facing many more issues than the previous ages. One needs to carefully design a retirement plan so that he/she has a continuous flow of money till death.
Firstly, there has been increased life expectancy, which means that you need to save enough so that your money lasts till your 90s. Bonds and securities now yield a comparatively lower rate of interest which is not sufficient for survival. Also, the concept of pensions has now been eradicated which has urged the need to design a strong and secured retirement plan.
“The trouble with retirement is that you never get a day off.”– Abe Lemons
So, how should you design your retirement plan? Almost all of us want to enjoy life and perform all the activities and adventures which was not possible due to heavy work schedules. Exotic vacations, novel writing, long trips with friends and families and a lot more, but for this, you need to have a good retirement plan to have enough assets and cash flow when you rest.
We have created a guide to help you design your retirement plan:
How much do you need for your retirement?
The hardest part of life is to imagine and estimate life itself. Thankfully, designing your retirement plan is not that awkward. All you need is a pathway to guide you through this. You need to sit down with a pen and paper and chalk out the plan for what your retirement life will look like.
Until and unless you calculate your estimated expenses after retirement, it won’t be possible to save sufficiently for your entire retirement life. Take into consideration various expenses and contingencies so that you don’t have to be at financial risk after your retirement.
Identify the future cost of all you want to achieve and consider various contingent factors like health, inflation and housing, etc. Since the current inflation rate in India is 5.7%, you need to plan for higher prices in future. Below are some of the factors you should keep in mind while identifying the amount you need to save for your retirement life:
- Housing costs, including rent or mortgage, water, electricity and maintenance costs,
- Healthcare costs, including a contingency amount for emergency situations,
- Day-to-day living like food, clothing, water, transportation, etc.
- Entertainment costs including restaurants, movies, plays,
- Travelling costs including vacation trip cost
- Potential insurance policy premium
The needs would vary from one person to another as not everyone is in the same situation. Experts say that you should save 90% of your pre-retirement income or Gratuity amount, some say that you should save 12 times your pre-retirement salary. But the actual need varies a lot from one person to another. Others believe that you should save 25 times your estimated retirement expenses, assuming that you only withdraw 4% of your savings annually.
How to start saving for your retirement?
After identifying how much you need to save, the next step is to find out how you will save the required amount. The later you are on saving, the more socks you need to pull up yearly to meet your goal.
So, it’s necessary that you start saving the amount as early as possible throughout your work career so that you don’t have to take an extra burden on your shoulders. You need to keep a few things in your mind before you start saving:
Make a budget
Before you start saving any random amount on a weekly or monthly basis, it is necessary that you first create a daily and monthly budget highlighting all the expenses and income that you generate from different sources. Keep proper track of your budget and add a separate line for retirement planning in your expenses column, so that you have an inner pressure to save money.
Automate the transfers
Making the transaction process automated creates consistency for you in saving the amount for retirement. You can set some date, like the day on which you get your salary or any other date, and direct your bank to transfer a particular amount to the investment. This reduces the risk of spending that money.
Clear all the debts
Most of us must have a goal to reach debt free by 60-65 years of age. It thus becomes necessary that you set up a payment mechanism so that all your debts are cleared before your retirement and reduce the burden on your retirement life. It can be in any form like a mortgage loan, credit card loan, education loan, etc.
Investing the amount saved
The next step towards successful retirement planning is to invest the amount you want to save in safe and high-interest-yielding securities. Only saving money won’t guarantee a stress-free retirement life, as the value of idle money degrades over a period of time.
Keeping in mind the current inflation rate of India, which is around 5.72% in Dec 2022, as stated by Forbes, you need to invest in a bond, stock market or some policies so that your interest rate is greater than the inflation rate and you are in a profitable position.
Where to invest the amount?
There are a lot of retirement money investment options present in the market. Securities, stocks and shares of companies, Mutual Funds, Government bonds, Debentures, Life Insurance Policies and many more. The rising awareness about investment has facilitated many emerging investment options in the market.
You need to carefully utilise the benefit of the power of compounding. For example, if you invest ₹ 1000 today in a fixed deposit for 10% interest, you will receive ₹100 as interest in the first year, but, in the subsequent year, interest would be calculated at ₹ 1100, that is, ₹ 110.
“If you don’t find a way to make money while you sleep, you will work until you die.” –Warren Buffet
Each alternative is different from the other. Some may offer higher interest rates but may be riskier, while others may put a limitation on the withdrawal of the amount. You need to carefully analyse each and every option and choose the best one for you. Some of the best investment options have been discussed below:
Employers provide retirement savings for a reason. Whether you use a 401(k) or an IRA, they are made to assist you in funding your retirement. These accounts, however, will only provide a percentage of what you could require in retirement. As a general guideline, you should have 10 times your annual wage saved up by the time you are 60. (k).
There are many categories of retirement accounts that facilitate you in saving money. These range from Employee-sponsored retirement plans to individual retirement plans.
Employer-sponsored Retirement Plans
These are generally divided into two categories:
- Defined Benefit Plans (DB plans)
- Defined Contribution Plans (DC plans)
When referring to a DB plan, the company guarantees to pay retirees who satisfy the eligibility requirements a specific sum. In other words, the plan specifies the benefit to be paid, which is often based on the final average income and connected to the length of service.
In DC plans, an annual sum of money or a particular percentage is set away by the employer for the benefit of the employee, such as Pension Plans.
Individual Retirement Accounts
The type of investment account that most individuals are likely most familiar with is an individual retirement account, which can be either a Traditional IRA or a Roth IRA. Both of these can be combined with a 401(k) plan and have tax benefits (if your income qualifies).
Individual retirement accounts are of three types:
- Traditional IRA
- Roth IRA
- Simple IRA
Retirement policies were a major part of retirement planning in earlier times. But slowly and steadily their importance is downgrading and people are moving towards other retirement planning options like retirement accounts and the stock market.
These include different policies like permanent life insurance policies, variable life insurance, and a host of alternative retirement-type policies such as annuities.
- Permanent Insurance Policy
There is a long history of the stock market providing a 10% return on average. Even though it’s obviously intended for long-term investors, individuals who start young and keep investing through difficult times are likely to see their portfolios recover and provide a return.
Fortunately, despite the fact that all stocks experience price fluctuations, there are many different types available based on your level of risk aversion. If you’re a more aggressive investor, you might shift your stock portfolio toward industries like technology that have higher growth potential but also more volatility, while more cautious investors might concentrate on blue-chip companies in industries like financials, consumer staples, or industrials that have historically had a lower potential for the biggest gains but also lower volatility.
All equities, however, have a risk of loss, and volatility profiles have evolved recently. Diversified equities funds, as opposed to individual stocks or investments in small sectors, are the best method to reduce exposure to market volatility.
A house may wind up being your most valuable asset, depending on where you live and when you bought your home. Many people sell their homes later in life and use the proceeds to help finance their retirement plans. Real estate can be a fantastic investment because its value tends to increase over time. However, as we witnessed during the Great Recession, this is by no means a guarantee.
Real estate essentially pushes you to save, even if renting can often be more affordable. You can then invest the difference and possibly make more over time than you would on a house. Your net will climb as you pay down your mortgage and as the value of your home increases.
The most common type of asset among retail investors, these funds have been operating for many years. In one investment vehicle, they hold a variety of stocks, bonds, and occasionally both. For consumers who don’t want to pick their own investments, mutual funds are the best option. Instead, a qualified fund manager can handle it on your behalf.
But, fees and flexibility are the biggest negatives. Fees for actively managed mutual funds are greater than for other investment vehicles since someone else is choosing the stocks. Additionally, since they are only valued after the market closes, you cannot purchase or sell them throughout the day.
As generation restructuring is happening, the need for future plans is rising. To live a risk-free and financially secure retirement life, one needs to carefully design his retirement planning and also implement it. There is rising awareness about savings, investment and various funds like PPF, Stocks, etc.
The basic idea is to identify the requirement of the amount to finance the expenses, the sources to save the amount and ways to multiply it. There are some professional planners also who design your wholesome retirement planning by charging some commission, but an active and aware retiree can strategize the plan himself.
As it has been rightly said, “Retirement is not the end of the road. It is the beginning of the open highway”.
Q1. When is the right time to retire?
Ans. People retire at various ages. But you should have enough savings and sources that provide you with a regular income for at least 30 years. It can be from any source like life policies, annuities, pensions, etc.
Q2. How can I make sure that my savings last longer than I do?
Ans. There is no need to worry about the vanishing of money as you will be living on your retirement savings. But to be on the safer side, you can opt for some rules like the 4% rule, where you will only use 4% of your total retirement savings annually. Sources like annuities provide annual income sources after retirement.
Q3. When should you start retirement investment?
Ans. There is no defined age at which you should start investing for your retirement planning. But it is preferable if you start investing the money as early as possible because a higher time period yields a high amount of interest.