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  • Krutik Tanna

Retirement Planning

Retirement planning is a multistep process that evolves over a period of time, it includes making a financial plan to fund all your post retirement expenses. Retirement planning starts with realizing your retirement goals and the time horizon available to achieve those goals.


These are 5 points that’ll help you to the path of safe and secure retirement:


1. TIME HORIZON

Understanding the time left to retirement plays a pivotal role in saving for retirement planning, it influences the amount of risk that an investor can bear and also affects the type of instruments to be used for retirement saving. An investor with longer time horizon let’s say 20 years can afford to invest in direct equity or equity mutual funds whereas an investor with a shorter time horizon let’s say 5 years can afford to invest in FDs or Government of India bonds.


2. DETERMINING RETIREMENT SPENDING NEEDS

Having realistic expectations about post retirement spending habits will help you defining the size of retirement portfolio accurately. Generally it is assumed that post retirement spending will be 70%-80% of the current spending, but over a period of time it this has proven to be unrealistic. One of the ways of calculating spending needs is to calculate the future value of current yearly expenses at average inflation rate of let’s say 7% for the number of years left till retirement. The amount that you get is the inflation adjusted expenses, life expectancy in India is 70 years, if you retire at the age of 60 you have to plan a corpus that’ll cover your expenses for at least 10 more years. The corpus should also include all other costs like travelling, nest egg, healthcare expenses, etc. The biggest risk in retirement planning is outliving your planned corpus thus determining your spending needs if very important.


3. UNDERSTAND YOUR RETIREMENT INVESTMENT OPTIONS

There are various investment options available for retirement planning, but the one that’s best suited for you depends upon your risk appetite and the time horizon for saving. PPF, Mutual funds (Equity and Debt), Direct Equities, Annuities, DRIPs (Dividend Reinvestment Plans) are some example of many instruments available. PPF provides a return of 7.10% just over the inflation rate. Equities have provided an average return of over 12% in the past 20 years. If you have a longer time horizon investing in equities makes more sense as the returns are significantly higher, you have more time to recover losses, taking advantage of wealth creation through compounding.


4. IMPORTANCE OF STARTING EARLY

No matter what type of investment account you choose one advice stays the same: START EARLY. There are various advantages of starting early like taking advantage of the power of compounding, making saving and investing a lifelong habit, etc. Below is a chart showing the future value of ₹100,000 growing at 10% p.a. The graph shows that if the money is invested for 40 years it gives the highest returns value of ₹100,000 at the end of 40 years is ₹45,00,000. The value keeps decreasing as the time horizon decreases.



5. KEEP YOUR EMOTIONS IN CHECK, BE DISCIPLINED:

Emotions are very likely to influence your investment decisions and in a costly way. When investments perform well, overconfidence takes over and you tend to underestimate risk and thus reduce your investment amount. When investments perform badly fear takes over and you take all your money to risk free assets thus missing out on any wealth creation. Emotional reactions make it difficult to build wealth over time. And potential gains are sabotaged by overconfidence, and fear makes you sell (or not buy) investments that could grow. A simple monthly SIP of ₹5000 growing at 10% p.a. can give you almost ₹2.80 Cr. at the end of 40 years. This shows the importance of discipline and compounding.


Bottom Line

The need for retirement planning is now more than ever with increasing healthcare costs and life expectancy and reducing dependency on off-springs. 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. Specific investing “rule of thumb” guidelines—such as “You need 20 times your gross annual income to retire” or “Save and invest 10% of your pre-tax income”—can help you fine-tune your retirement strategy. Still, it’s helpful to remember the big picture, too. The best solution is to focus on creating a flexible portfolio that can be updated regularly to reflect changing market conditions and retirement objectives. You can improve your chances of enjoying a comfortable future if you learn about your investment choices, start planning early, keep your emotions in check, and find help when you need it.

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