The Simplest Guide to Retirement Planning You’ve Ever Heard

Retirement is an enjoyable as well as a delicate phase of a person’s life. People are happy and free from the responsibilities of a job but at the same time, growing medical and personal expenses are hard to cater for with very lower sources of income. Thus, it becomes essential to have a well designed financial plan right from the beginning to manage the expenses of life after retirement. Retirement planning is the financial planning of deployment of investments to create a retirement Corpse Fund which can aid in maintaining a decent lifestyle after retirement. In this blog, we address the major question of how to create a retirement plan and the possible sources of investments for the retirement Corpse Fund. 

How to devise the retirement game-plan

Step 1: Start as early as possible 

Making your money work for you is the art of investing. Starting your contributions to the retirement plan early in your career will help to attract the power of compounding. Investing for a longer period can magically grow your funds with the compounding factor. Hence, it is advisable to start your journey towards retirement planning early as it saves the number of contributions to be done.

Step 2: List your probable expenses in future

It is important to understand the cash flow requirements based on the expenditures to be incurred in post-retirement life. The cash flow estimate will determine the amount of Corpse Fund needed after retirement to sustain without any employment income. For example, if your monthly expenses are ₹25,000, your annual expenses would be ₹300,000. Multiply this total by the number of years you will live after retiring. Say, for example, you live for 20 years after your retirement, then your total expense fund required would be ₹60 Lakhs at current value. To that, we apply the inflation factor of 7%to calculates the minimum corpus of funds for your retirement at the future date after 20 years. Then the minimum Corpse fund comes to ₹ 2,32,18,106.7. You must plan your investments to meet the above goal. 

Step 3: Devise the best portfolio to invest

Based on your investment horizon and amount dedicated to investment, you can devise the list of assets that can form part of your retirement portfolio. For this, you need to take into account five factors like Returns, Risk, Liquidity, Safety, and Taxability. Based on these factors, the sum of investment can be divided into proportions for different asset classes. Furthermore, build your portfolio with a good mix of equity, debt, PPF, real estate, and so on.

Step 4: Allocate a part of your salary to investments

After devising the right portfolio, start contributing a certain percentage of your salary towards the investments. Monthly investments can draw the power of compounding, and over time, a large Corpse fund can be generated with little effort. A monthly investment of ₹10,000 at a rate of 10% will result in a Corpse fund worth ₹1,33,78,903 after 25 years. You may begin your investments with Mutual Fund SIPs or Stock Market Investments, Real Estate Assets, and so on, depending on your needs. 

Step 5: Buy a Term Insurance and Health Insurance

Securing our life with insurance cover is a must. Being prepared for the worst-case scenario is critical to prevent any fatal calamities. A health insurance policy will protect you from any major health problems that necessitate surgery or hospitalization. Furthermore, everybody should have term insurance to protect their loved ones’ lives in the event of an untimely demise.

Step 6: Set up an emergency fund

If the pandemic has taught us something, then it is to never take our life and money for granted. Setting up an emergency fund is the need of the hour. Life is truly unpredictable, and no one wants to end up in a soup during tough times. To prevent such circumstances, everyone should have an emergency fund that covers at least 6 months of their expected expenses.

Step 7: Keep revising your retirement investment plan

When your employee tenure increases, so do your remuneration. As a result, to keep up with the times, you should revise your investments regularly. If you are a bachelor, your expenses are much lower, allowing you to contribute more to your savings. However, when one grows older, more obligations come with it, such as marriage, children, and so on. As a result, the required adjustments should be made to optimize the contribution to investments.

The five-step plan outlined above will point you in the right direction toward achieving financial independence long after you retire. However, in addition to the game plan, one must pay close attention to choosing the right asset classes. Otherwise, the fund’s desired growth would not be achieved. So, below are the top five asset classes that can add value and potentially have higher returns than other asset classes. It should be noted that a mixture of the following assets must be selected to secure as well as grow the retirement Corpse fund. 

Asset Classes for Retirement Plans

• Equity / Stock Market 

The equity asset class carries a high level of risk, but it also can produce the highest returns. This risk can be reduced by allocating funds for a long-term horizon. However, due to the high uncertainty of the stock markets, it is best to allocate a lower percentage of savings to equities for retirement planning. For individuals having less financial responsibility can invest a higher proportion in the Stock Market. But for those having high financial liabilities, can invest a lower percentage in Stock Market to protect against volatility

• Mutual Funds 

Mutual funds are the most favoured asset class in retirement planning. They can provide average returns of 8 to 15% with the benefits of monthly investment plans, long-term parking of funds managed by specialist asset managers, and diversification opportunities within the fund into equity, debt, and money market. The compounding effect of mutual funds is the biggest factor in multiplying funds for the long term. One thing to note is that since mutual funds are market-linked, the risk factor persists. Hence, mutual funds will also follow the same allocation as that of Equities.

• Real Estate Investments 

Real estate investments provide a two-fold benefit of capital appreciation as well as consistent rental cash flows. Hence, they are an ideal bet in retirement as the rental income replaces the monthly salary up to a certain percentage. Furthermore, using leverage to buy real estate can help you save taxes with an exemption on complete interest payments for let-out properties. This can further help to contribute more towards the retirement investment Corpse fund.

•  Public Provident Fund 

PPFs have the lowest risk and pay a fixed interest of roughly 6 to 7 per cent per annum. Also, they have a tenure of 15 years which comes with a 5-year lock-in that allows for partial withdrawals after 5 years. Though they are illiquid, the compounding over 15 years results in a satisfactory fund in itself. Apart from this, the interest in PPF is credited by nationalized banks that are safer in terms of solvency and accountability. Thus, it makes PPF an indispensable security warrior against all the risks of market-linked assets. It is, therefore, advised to allocate around 10 to 15 percent of your investments to PPF.

• National Pension Scheme 

The National Pension Scheme is just like a mutual fund with regular contributions to the scheme for investing in a mix of equities, debt, and other asset classes. This scheme is managed by the Central Government and is safer as compared to mutual funds in terms of solvency and ethical practices. However, a portion of NPS is market-linked and a certain risk is attached to it. But overall, it produces an average return of 8 to 10 per cent annually. The contributions are to be done till the age of retirement. So, on your retirement, you can withdraw a percentage of the fund in a lump sum and the rest will be disbursed monthly. These monthly disbursals can be utilized for monthly expenses.

To put it in a nutshell, Retirement planning requires a great deal of attention and must be carefully formulated taking all the factors into account. With this article, we have concisely put the proper approach to retirement planning. Following the above game plan in retirement planning will place you in a far better position financially after your retirement and you can spend your post-employment life with ease and comfort. One can tailor the above game plan to suit his/her personal needs. To experience financial independence in your old age, start your retirement investment planning right away!

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