Most of us tend to procrastinate on planning for retirement. However, early planning for retirement will go a long way in ensuring that life after retirement will continue to be as smooth as it was before it.
Compounding multiplies the money at an exponential pace as returns are earned on your investment returns. This means that the earlier you begin retirement planning, the more money you will have after you stop working.
For example, for 20 year olds who want the retirement funds at 60 to be INR 2 crores, then an investment of INR 1700 per month, with 12 percent annual return, is needed. People who are older need to contribute more to the retirement funds to achieve the target of 2 crores. Thus, other conditions being same, 30 and 40 year olds will need to increase monthly investments to achieve the target. It is therefore important to start early and regularly make contributions in a disciplined manner to have a good retired life.
Investing for retirement involves a lot of planning and is dependent on several factors.
Listed below are some factors that need to be considered in order to be able to make an estimation of the amount that can be saved for retirement:
- Retirement age: In India, people officially retire at 60 years. However, some people continue to work till they are physically able to do so, while others voluntarily retire at an earlier age. Calculate the working years remaining after choosing a retirement age.
- Rate of inflation: It is also important factor in rise in prices when retirement planning. Since there is no earning after retirement, all spending will be from the corpus. Inflation will affect the corpus as well as the income. Assume the inflation rate to be around 7 percent.
- Life expectancy: We are not immortal and hence life expectancy needs to be taken into consideration to determine the lifespan after retirement. Choose a fixed age of demise to be able to calculate the retirement corpus. The average life expectancy in India is around 78-80 years. But for calculation take 90 years because life expectancy is improving with every passing day.
- Rate of Return on investments when working: This factor is dependent on allocations and investments in real estate, gold, debt, equity, and varied other assets. The rate of returns tends to be higher in equity and other growth assets; hence higher investments in such assets mean higher returns. Debt instruments yield slight reduced returns. Assume an annual return rate depending upon asset allocation mix of portfolio:
- 18 to 25 year olds, generally, have no dependents or liabilities and are just beginning their career. Both income and expenses are low. Retirement is a long time away. Hence, high equity exposure is affordable. The portfolio components can be 25 percent debt and 75 percent equity.
- 26 to 35 year olds, have higher income and liabilities, but equity exposure is affordable as retirement is still a long time away. Due to high liabilities, opt for higher fixed-income securities to offset market volatility. Ratio of debt and equity investment can be 30:70
- 36 to 45 year olds, have income lower than liabilities. Equities can make up about 55-65 percent of portfolio, while debt investment can be 64 – 55 percent respectively.
- 46 to 55 year olds, are close to retirement and corpus needs to be protected from market volatility. It is best to go for a portfolio with a 50-50 percent mix of equity and debt.
- Expenses after retirement: Inflation tends to affect money’s purchasing power. Hence, it is important to calculate the amount of money require to sustain a lifestyle and expenses that you currently have. The formula (FV = PV (1+(i/ 100)) ^ T) may be used for calculation of current expenditures’ future value.
- Rate of Return on investment post retirement: We usually do not opt for excess risk after retirement and hence the portfolio generally has more of debt instruments. This influences the returns rate and hence it has to be different for the years after retirement.
Financial planners have pointed about that the main aspect of planning for retirement is its separation from medium and short term targets like children’s education, purchasing a house, etc. It is important to remember that the corpus needs to be used only after retirement. Lack of goals may lead to indiscipline and complacency which can adversely affect the amount that you want to save up as corpus.