3 Ways To Turbocharge Your Retirement Savings
Is India Retirement Ready? Not really. The 'India 2016 Retirement Readiness' survey published by Aegon Life indicated that only 64% of Indians are "prepared for their retirement". The same report also went on to infer that just 59% of Indians are habitually saving for their retirement. These are not encouraging numbers. With life expectancy going up by roughly 5 years every decade, and the joint family system gradually disintegrating in urban areas, it's imperative that all of us - regardless of life stage, age, or demographic, accord a high priority to planning for the building of a rock-solid retirement corpus that will comfortably outlast us.
If you're wondering how to start accelerating your progress towards this critical goal, here are three steps you could take.
Don't assume - do the actual math
It's not uncommon for us to fixate on an arbitrary number (for example, 1 crore or 5 crores) and make that our retirement planning target. Our savings amounts tend to be unstructured as well. This is an incorrect approach. Ideally, you must sit down with a Financial Planner and do the math to arrive at a more planned corpus target. Do bear in mind that this is no easy task - there's a reason why Nobel prize winner William Sharpe called Retirement Planning the "nastiest problem in finance"! However, we can make a best effort at estimating our post retirement spends, based on our discretionary and lifestyle spends made today, and by factoring in a reasonable inflation figure into it. To make the plan more robust, you should consider your PF savings being made, the maturity value of your Life Insurance policies, and anticipated bequeathment amounts too. You may be surprised to find that you're already pretty much on track, and there's a relatively small gap to be plugged - if you don't delay. Which brings us to the next point.
Start Early & Don't make Partial Withdrawals
Starting early can have a massive impact on the final value of your retirement corpus. Though it's a well-known fact that the best time to commence retirement planning is "when we receive our first pay check", only a miniscule percentage of us actually get down to following this maxim. Irrespective of the amount you start committing, starting early is great for two reasons. First, the moneys you put away early on in your savings cycle will have many decades to compound, and this can have a massive impact on your retirement corpus. To put this in perspective - even Rs. 50,000 (Rs. 4,000 per month) put away at the age of 25 and left untouched until the day you retire at 60, can grow to Rs. 26 lakhs at a reasonable annualized 12% CAGR! It's equally important to not make partial withdrawals from your Retirement Fund to pay for lifestyle expenditures. Even seemingly small withdrawals can create a massive dent in your final fund value. Stay committed and disciplined, even though the goal seems very far away now.
Think beyond Life Insurance
In India, the typical knee-jerk reaction to Retirement Planning is to buy a Life Insurance policy. This can be partly attributed to our general intolerance towards risk, and partly to a still low level of overall awareness about other high growth investment avenues. Traditional (endowment) plans actually make for very poor Retirement Planning tools, as they are structurally incapable of delivering more than fixed income returns, which are likely to not even be inflation beating.
Even most ULIP's, that have the potential to be provide more aggressive long-term returns by harnessing the power of equity markets, are ravaged with charges and inbuilt costs that could work to your detriment. When it comes to your retirement goal, don't let your risk tolerance level determine your choice of asset class. Remain as aggressive as you can until the last 5 years leading up to your retirement, at which stage you could consider systematically de-risking your portfolio from equities. Be prepared for some bumps along the way, knowing fully well that equity markets are bound to outperform other asset classes in the long run. An annual, disciplined asset rebalancing process that would automatically result in profit booking is all you really need to manage the risks associated with equities.
