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How to do retirement planning

In this article, we will understand why should you do retirement planning and how to do retirement planning.

What is retirement planning?

Retirement planning is the process of building a fund during the working years. The fund is invested during retirement years to generate regular passive income to meet everyday expenses. It is the process of ensuring financial stability and independence during retirement years. It involves building a social security nest that can help individuals live a life of dignity during his/her retirement years. This article will explain why you should do retirement planning and how to do retirement planning.

Why should you do retirement planning?

You should plan for your retirement because income is temporary, but expenses are permanent. Once you reach your retirement age, your active income is going to stop. However, your expenses are not going to stop. In fact, with every passing year, your annual expenses will increase due to inflation.

You should do retirement planning so that you don’t have to continue working beyond the usual retirement age of 60 years. A retirement fund will help you sustain yourself during your retirement years without depending on your children or others. In addition, you should build a retirement fund to help you manage your annual expenses after factoring in yearly inflation.

Retirement readiness of Indians

In January 2020, PGIM India Mutual Fund, in partnership with Nielsen India, did the Retirement Readiness Survey 2020 to assess the retirement readiness of Indians. The survey revealed the following essential points among others:

  1. Indians are focusing more on current expenses than retirement planning.
  2. For most people, planning for a child’s needs (higher education and marriage) is at the top of the priority list, and retirement planning comes last.
  3. Urban Indians spend 59% of their monthly income on current expenses, and only 29% is going towards savings (17%) and investments (11%).
  4. Only 49% of the people surveyed had a retirement plan in place, and 51% of the respondents said they don’t have any retirement plan in place.
  5. An interesting observation was that retirement planning is linked to people’s income and not age. The higher the income, the higher is the incidence of retirement planning. This means people are willing to fund their retirement fund from surplus income and significantly less likely by sacrificing current expenses.
  6. People who have a retirement plan invest majorly in life insurance (41% of respondents) and fixed deposits (37%). Only 10% of them invested in mutual funds.
  7. 52% of the respondents said they are aware of the amount required for retirement. 42% were not aware of the amount necessary once they stop working actively

We have seen the survey highlights let us understand how individuals should go about doing retirement planning.

Steps for Retirement Planning

Let us understand the steps for retirement planning with the help of an example. Ashish is a 28-year old individual. He has 32 years to plan his retirement. Let us see how he can go about doing his retirement planning step by step.

Calculate expenses at the time of retirement

Ashish’s monthly expenses are Rs. 22,000 (annual expenses = Rs. 2,64,000).

Ashish’s current age is 28 years. Hence, the years left to retirement is 32 years

Annual inflation is expected to be 6% p.a.

Expenses at the time of retirement:

If Ashish’s current annual expenses of Rs. 2,64,000 increase by 6% p.a. for the next 32 years, then by the time Ashish reaches his retirement age (60 years), his annual expenses will reach Rs. 17,03,694 (monthly expenses = Rs. 1,41,974).

Chart 1: Increase in annual expenses

The above chart shows how Ashish’s annual expenses will grow from Rs. 2.64 lakhs at age 28 years to Rs. 17.04 lakhs at age 60 years at the inflation rate of 6% p.a.

  • Calculate the retirement corpus

Ashish is doing his retirement planning with a life expectancy of 80 years. So, he will be planning for a retirement fund that will last him for 20 years post his retirement.

During the retirement years, inflation is expected to be at 5% p.a.

Ashish is expecting his retirement fund to grow at 7% p.a. during his retirement years.

If Ashish’s retirement fund grows at the rate of 7% p.a. and his annual expenses grow at the rate of 5% p.a., he will have to build a retirement fund of Rs. 3,00,83,670 (Rs. 3 crores) for his retirement life of 20 years (age 61 - 80 years).

Chart 2: Retirement corpus

The above chart shows how Ashish’s retirement fund will get utilised over his retirement life of 20 years (age 61 - 80 years).

So, Ashish will have to build a retirement fund of Rs. 3,00,83,670 (Rs. 3 crores).

  • Building the retirement fund

Ashish has 32 years (current age is 28 years) to build the retirement fund. He expects his investments to grow at a compounded annual growth rate (CAGR) of 12% p.a.

Ashish will have to make an annual investment of Rs. 88,111 (Rs. 7,343 per month) to accomplish his financial goal of building a retirement fund. He will have to invest in a diversified portfolio of equity mutual funds, fixed income products, and gold.

Chart 3: Building the retirement fund

As shown in the above chart, if Ashish’s annual investment of Rs. 88,111 grows at the CAGR of 12%; then, he will accumulate his retirement fund of Rs. 3 crores in 32 years.

Ashish will have to review his investment plan regularly, once every 6 months, to check if his investments are performing as expected. In addition, as his age increases, he will have to adjust his asset allocation.

Things to take care of during retirement years

Once an individual retires and has built his/her retirement fund, he/she should have the following:

  1. Emergency fund: During retirement years, along with the retirement fund you should maintain an emergency fund. This fund is required to take care of any medical emergencies and/or any other unexpected expenses that may emerge from time to time. If you are incurring any recurring medical expenses then this should be included in the emergency fund separately.
  • Adequate health insurance cover: An individual should re-evaluate his/her health insurance cover on retirement. As an individual’s age increases, his/her health becomes vulnerable to illnesses. Hence, the individual should make sure he/she has adequate health insurance cover. You may separately add a critical illness cover.
  • Optimum utilisation of retirement portfolio: The individual should invest in the retirement fund so that he/she gets optimum returns with the lowest risk. He/she should make the best use of the income tax deductions and exemptions available.
  • Major life changes: You should have additional provisions for any financial liabilities (loan EMIs) and/or financial responsibilities (a child’s higher education, marriage, etc) that are yet to be discharged during retirement years.

Financial Independence Retire Early (FIRE)

The Financial Independence Retire Early (FIRE) movement started in the US but is now catching up in India and other countries. The FIRE concept aims at retiring before the age of 40 years rather than the usual period of 60 years.

The FIRE concept involves spending less and saving more, usually a high portion of your monthly income. The savings are channelled into investments to generate passive income. Once the passive income exceeds the active income, the person is said to have achieved financial independence and retire early. Proponents of the FIRE movement aim at their passive income crossing their active income before 40 years. We will talk more about the FIRE concept in the coming blogs. So, stay tuned!

Retirement goal planning with the Glide Invest App

In the 21st century, technology has played a vital role in shaping up how we conduct our financial affairs. Today you can open up your phone and tap a few buttons to select your retirement goal plan and systematically invest towards creating your retirement fund with Glide Invest. You will get guidance for:

  1. A personalised risk profile assessment
  2. Identifying your financial goals
  3. Appropriate asset allocation
  4. Making a financial plan for each goal
  5. Automating the financial plan
  6. Review and analysis of your financial plan
  7. Hand holding you till your financial goals are achieved

To start investing towards your financial goals, download the Glide Invest App now from Google Play Store or Apple App Store and get started.

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