Most people spend their initial working years taking care of the dependents and providing for them. It is not until they are in their forties or fifties that they start thinking about retirement and planning about it. They tend to rely on employer benefits like PPF, Insurance, etc. for their retirement needs often realizing too late, that it's not enough. At this time, questions like, "Have I saved enough?", "When should I retire?" and "How much will I need for retirement?" start cropping up.
One of the biggest mistakes people make is to not make any separate investments for retirement while investing for other goals. In fact, they start thinking about it much later as they believe they still have time to plan.
In reality, the best time to start planning for retirement is as soon as you start earning as this allows time to work on your investments. If you haven't started planning for your retirement, start now. The idea of "retirement" is that you work only because you want to and not because you have to.
Ask yourself, "At what age do you wish to retire or slow down?", "How much income would you need if you were to retire today?" Exclude children’s expenses, EMIs from your current monthly expenses. Include expenses like health, entertainment, and travel if not included already. Identify a clear goal "I will retire on 1st January 2040. I want an income of Rs. 1 Lakh per month (in today's terms) till my age of 85." Besides this, you need to account for a few other things;
- Where will you live? Will it be in the metros or somewhere quiet?
- How will you address your medical and other contingency needs?
- What kind of investments should you make to build your retirement corpus?
- What kind of risks are you currently exposed to?
- How much risk are you currently taking? Is it too much or nothing at all?
The best approach would be to consult a financial planner to help you plan, keeping all your needs in mind. In the meantime, here are a few general tips to help you get started;
1. Save 25 per cent of your gross income every year. While this may seem like a very small amount, over time it adds up to make a big portion.
2. Don't let your money be idle. Often people lock their savings in FDs but don't account for inflation which ends up eating into their wealth.
3. Invest aggressively in equity early on. It has the potential to deliver great returns in the long run. In the accumulation phase, your objective should be to maximize returns while taking a certain amount of risk.
4. Don't be scammed by casual advice. Bankers, insurance agents, and others tend to sell you plans that aren't useful for the long run, leaving you accumulating products serving little to no purpose.
It's important to understand that you cannot take a one size fits all approach while planning and investing for retirement. Your plan will be based on your current age, current asset base, expenses, and overall risk profile. Your investments will depend on your liquidity needs, financial goals, return requirements, time horizon, and risk appetite.
While you focus on your retirement goal, make sure to look at Will and Estate planning. If you have dependents, then you need a Will. This will not only ensure a smooth transition of funds/assets to your loved ones but will also ensure that your wealth gets distributed as per your wishes, avoiding any financial disputes. While this can certainly be a morbid thought and you might end up avoiding it, not getting the Will made might cause further disputes in the family.
You can follow a simple process to help you get started with the Will.
- List your assets and decide who gets what.
- Appoint two executors.
- Decide on the beneficiaries to whom the assets will be transferred to.
- Attest the Will by two witnesses. In your witnesses, preferably one should be your doctor.
- Register the Will
Talk to an estate planning lawyer. Creating a will can cost a few thousand rupees to much higher amounts depending on the complexity of the Will and the reputation of the lawyer.
The author is CFA, founder of Happyness Factory, a goal-based fintech platform.