Why Retirement Planning Is More Important Than Ever

Who doesn’t want to stay young forever! But aging is inevitable. One may not think about retirement while they are in their twenties or thirties, but it deserves utmost priority. This is especially in India where social security benefits are lacking and one has to fend for oneself in old age. On top of it, inflation is an invisible enemy that depletes your savings slowly.

Why retirement planning is needed

We slog our whole life to maintain households and fulfil family responsibilities. Retirement is when you break free. You spend time the way you want. But unless you are financially free you cannot break free in the truest sense. You need a realistic understanding of how much corpus you may need by the retirement age. There are three key reasons for it:

i) No social security – India, unlike the West, doesn’t offer its population social security. While there are still schemes for employees in the organised sector, self-employed and those working in the unorganised sector have hardly any options. One needs to put in efforts to especially save for retirement for a comfortable evening of life.

ii) Rising cost – What you can buy with Rs 1,000 today will not be the same tomorrow. Inflation decreases your purchasing power unless your income is growing at a faster pace. For example, consider your monthly expenses at Rs 1 lakh, years left to retirement at 30 and inflation rate at 6 per cent. If you want to maintain your lifestyle post retirement, you would need more than Rs 5 lakh each month. It means what you can buy today with Rs 1 lakh will require you Rs 5 lakh post retirement.

iii) Medical inflation – Old age comes with health issues. Your medical expenses might make a big chunk of your monthly outgo. On top of it, medical inflation is much higher than regular inflation. For example, if regular income is 6 per cent, the medical inflation could go as high as 10 per cent or even higher. Keep this aspect in mind when planning retirement.

How to plan for retirement

Retirement planning is one of the most important financial goals in financial planning. The sooner you start doing it, the better it will be. How to do it, you ask?

i) Inflated monthly expenses - First and foremost, you need to come to a figure as to how much monthly amount you would need to suffice your monthly expenses post retirement. This will be closer to your existing monthly expenses adjusted for some expenses that may not last post retirement such as children’s college or tuition fee. You inflate your existing monthly expenses by the average inflation rate, and you will get the future value of your monthly expenses.

ii) Retired life - Next up is life expectancy. For how long do you suppose you would stay alive? Ideally, one should consider 80 years of life expectancy. Your retirement corpus should be enough to last for 20 years if you retire at the age of 60.

iii) Retirement corpus – The above factors will help you calculate the retirement corpus. This is the amount you should target to accumulate by the time you retire.

iv) Beat inflation - Remember your income will stop post retirement but your expenses won’t. Inflation is a key factor when calculating retirement corpus. Since you would find it hard to curtail your monthly expenses it is better to focus on increasing your passive income. It means you shouldn’t leave your retirement corpus lay ideal in a bank account. You should invest it smartly in different investment avenues. However, you cannot go whole hog on products like equities after you turn 60. You need safety more than higher returns.

iv) Retirement fund – Once you are aware of the value of the retirement corpus, you need to create a retirement fund, that is, focussed investing to accumulate retirement corpus. Start investing in equity mutual funds or other such products for the same.

Retirement planning is a serious work. While one can do it oneself, it is better to approach a professional who can guide you as per your financial situation, and risk appetite. Financial freedom is a must, especially when your hair turns grey.