Retirement Planning: Why And How To Get Started

Gone are the days when retirement mainly revolved around spending time with grandkids and actively participating in the community’s social and cultural scene without worrying about money. Earlier, most retirees received pensions and could rely on their children to care for them. 

However, things are changing. Nowadays, most of us don’t have the luxury of receiving a pension, families are getting nuclear, and people are settling in a different city or country altogether. In this context, retirement planning, i.e., building a retirement corpus and managing expenses after retirement, is a non-negotiable financial goal. 

Importance of Retirement Planning

Let us see what makes retirement planning crucial 

Lack of income: Before retirement, we get a steady pay check every month. However, after retirement, our income stops or reduces drastically. Hence, effective retirement planning is necessary to help us with a steady source of income. 

Lifestyle Maintainace: You have to plan for your retirement if you want to continue with your current lifestyle, as inflation reduces the value of money over the long term. 

Not depending on Children: You wouldn’t want to depend on your children for your financial needs in your sunset years. Your children may financially care for you without any qualms, but depending completely on them can be a source of trouble in the years ahead. 

Aspects of Retirement Planning

Retirement planning involves multiple factors which depend on your individual goals. The first thing would be to understand how you wish to spend your retired life. This might include travelling, focusing on hobbies or pursuing new career opportunities. Basis this, the next step is to figure out the money required for all these in your retired years. To calculate this, one will have to take into consideration the years likely to be spent retired, life expectancy, current monthly expenditure, medical and healthcare expenses and the corpus that you would want to keep as a part of the emergency kitty. 

To make this easier, you can make use of online retirement calculator or seek the help of a financial advisor who will guide you to build a portfolio towards meeting your retired life expenses. After that, you must start your savings and investments to build that corpus.   

Building Retirement Corpus

To meet your retirement corpus requirements, ensure that you make use of multiple asset classes such as equities, debt, commodities (gold/silver), REITs etc. This is because each asset class has a unique role to play in a portfolio over the long run. Equity has the potential to generate wealth, while debt reduces the overall risk in the portfolio while gold acts as a hedge against inflation.  

Typically, equity as an asset class is considered one of the best investment avenues for long term financial goals as this asset class is known to outperform others by a handsome margin. So, if you are in your 20s and 30s, you can consider investing into equity schemes for your retirement related savings. While the journey may be rocky in the near term, over a decade plus investment horizon the journey will even out and the benefits of compounding will start playing out. This will help your retirement kitty to grow faster if you start investing for your retirement earlier. 

On the other hand, if you are an individual nearing retirement, then capital protection will take precedence. Hence, park a substantial share your corpus in debt and allocate the remaining portion to equities as one will require growth as post-retirement life may very well stretch over three decades. Hence, forgoing equity investment completely might not be the right approach.    

Let us consider the case of Gita and Sita. Gita started investing for building a retirement corpus at the age of 25, while Sita start investing for the same purpose at the age of 35. Gita invested ₹5000 per month for 20 years, while Sita invested ₹10,000 every month for 10 years. In effect, both Gita and Sita invested ₹12 lakhs.

Assuming an average return of 12%, Gita accumulated nearly ₹50 lakhs while Sita’s investment value stood at ₹24 lakhs. The only difference between Gita and Sita was the duration for which their money remained invested in the market.

To conclude, retirement planning is a must for everyone and needs to be throughly thought through as it is important to build a corpus which can outlive you.