Planning Retirement in the Right Manner
27th November 2019 | 5 min |
The sooner you kick start your retirement plan, the better it is. An early beginning certainly has a number of advantages; your money has more time to grow and attain a substantial proportion. Make sure the corpus is adequate to help you maintain your lifestyle during your golden years. Don’t forget to factor in inflation.
In India, the average life expectancy has seen a rise in the past few years. Life expectancy has grown from 47 years in 1969 to 69 years in 2019. Increasing life expectancy also means an increased number of post retirement years to plan for.
In today’s times, with evolving lifestyle, many a times savings and planning for retirement is put on the back burner. However, this is obviously not the optimal approach. It is imperative that you have a ready financial plan in place so that you wouldn’t have to compromise on your lifestyle when you don’t have an active source of income anymore.
In order to make a comprehensive retirement plan, you will have to consider the following factors:
The maxim 'Early bird gets the worm' assumes significance when it comes to retirement planning. Early-mover advantages are aplenty, considering your money can compound and become a substantial amount over a period of time.
For example, Rs. 1 lac invested every year starting at age 35 leads to a corpus of Rs. 79 lac for retirement at age 60 (assuming investment returns @8% per annum. If one begins savings just 5 years earlier, from age 30, they would be able to create a retirement corpus of 1.2 Cr. (50% extra).
This is certainly the basic when you begin planning for retirement. You’d have to factor in your lifestyle, have a tentative list of needs in mind going forward, and count in probable medical expenses during your sunset years. This way, you’d be able to zero in on an amount that would help you maintain a respectable lifestyle and fulfil other life goals. It is recommended that one should at least save 20% of the income.
Projecting rate of inflation
In order to fully understand the amount you’d require post-retirement, projecting future rate of inflation is of paramount importance. While inflation doesn’t usually fluctuate much over the shorter term, chances are it would in the long-run. Hence, it is crucial to factor in inflation prior to evaluating your investments.
In case you overlook this step, you might end up accumulating an inadequate corpus that would not be enough to take care of your financial needs once your active income years have already passed you by.
Knowing your risk appetite
You should choose appropriate financial instruments to construct your retirement saving portfolio depending on the quantum of risks you’re willing to take. For instance, while investments in equity have the potential to deliver higher returns, they entail a higher degree of risk. On the other hand, debt instruments - while keeping risks in check - potentially offer steady but lower returns.
While risk appetite varies from person to person, experts recommend keeping a higher proportion of retirement savings in high risk-high return instruments (such as equities) in the earlier stages of retirement saving, progressively moving to debt-oriented instruments as one approaches the date of retirement.
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