Retirement is an important milestone in your life and planning your finances for that is a long process not to be left for later stages of your life. The key to successful retirement planning is starting early, evaluating post-retirement needs and going for products that not only help you reach the targeted corpus but also protect it from the vagaries of the market.
If your monthly expense is Rs 30,000, and you retire 30 years from now, you will need Rs 1.80 lakh every month, assuming that the annual inflation rate is 6%. Even if you can manage with 80% of your present expenses, that is, Rs 24,000, you will need Rs 1.44 lakh every month.
There's more. If you live till 85-with rising living standards and progress in medical science, this is a conservative estimate-that is, for 25 years after after retirement (assuming you retire at the age of 60 years), the value of the nest egg you need to build is a staggering Rs 4.5-5 crore. This if we assume 6% annual inflation and 12% return on investment before retirement. If we assume 8% inflation, the corpus required is a mammoth Rs 12 crore.
Mondeo Financial Services is working on creating “pensioned society from a pension less society” Some people have told me that, senior citizens in the United States get pension. What they ignore is the fact that, the pensions received by retirees in the US come from the Individual Retirement Accounts (IRAs) where people put a portion of their savings in stocks, bonds and mutual funds throughout their working lives. Even the Social Security Pension, a Government programme in the US, comes from the social security payments that employers deduct from the employees’ salaries when they are working.
Anyway, coming back to India, with changing socio-economic conditions in our country, e.g. job mobility, nuclear families, changing lifestyles, rising cost of living (including healthcare) etc, retirement planning is now more important than ever before. We have identified 6 common retirement planning mistakes that individuals must avoid for securing their risk free financial retirement.
It is human tendency not to worry about a problem that will not affect us in many years, but just because we are not worried about a problem, it does not mean that the problem does not exist. Once retirement looms large, you will start to worry about it, but it may be too late. Starting to save and invest for your retirement from an early age has great benefits.
If an investor wants to set a goal of creating a retirement corpus of say, Rs 1 Crore and retirement age at 60, he or she can achieve it with much smaller savings simply by starting earlier, as shown in the chart below.
We can see from the chart above that starting early has major benefits. Starting too late, on the other hand, will put your retirement planning at serious risk.
common mistake is to ignore or even underestimate the impact of inflation on expenses. Inflation cannot be wished away and it reduces the value of savings. This means than an expense of Rs1,000 in 1986 would be nearly Rs8,300 today. Now, if we extrapolate 20 years forward, an expense of Rs8,000 today, even at an inflation rate of 5% (assuming the long term inflation is contained within 5%, as the Reserve Bank of India expects to), would be nearly Rs22,000. In other words, if you are 30 years old and your monthly expense is Rs 20,000, you should expect your monthly expense at the same lifestyle to be nearlyRs 90,000 by the time you retire. Mind you that, your lifestyle expenses are certainly going to increase as your income increases
While health insurance or Mediclaim is essential for all, it is even more relevant for senior citizens, because health risks increase substantially with advancing age. In the absence of Mediclaim, a serious illness in your family can cause financial distress at a time when you least expect it. Even if you are covered under the group health insurance plan of your employers, you are likely to lose the health cover once you retire, whether you continue with your pre-retirement health insurance plan or buy a new plan, it is imperative for senior citizens to ensure that, they have comprehensive health insurance cover to meet any medical emergency.
Debt in any form has a cost associated with it, Home loans, vehicle loans, credit card loans etc, have interest cost which comes out of our savings, we should strive to be debt free early in life, so that we can free up our savings to work towards our retirement planning.
Most Indian retail investors like risk free or low risk assetsas long term investment options. Accordingly they often opt for risk free or low risk investment options like small savings schemes, bank fixed deposits and life insurance savings plans with guaranteed additions for long term investments. Investing in low risk investment options can result in falling short of your retirement plan or other long term financial goals. Risk free or low risk investment options often fail to beat inflation (especially relating to the urban consumption basket) on a post tax basis or at best barely manage to keep up with inflation. Equity as an asset class has historically been able to beat inflation in the long term and create wealth for the investor. For long term investors, not meeting the financial goal is the real risk. Equity has created real wealth for investors over the last 25 years. It is essential that equities form a significant portion of your investment portfolio to help you meet your retirement goals.
Retired lives can now last 25 to 30 years or even more. Yields of low risk assets may not be sufficient to meet your post retirement expense needs and prolonged drawdown from your asset base can result in you running out of your funds and losing your financial independence.
Suppose you have accumulated a retirement corpus of Rs 1 Crore. Let us assume your monthly expense is Rs 50,000; your annual expense is 6% of your retirement nest egg. Let us assume, after retirement you deploy your corpus in risk free assets like fixed deposits giving you interest rate of 7%. Some of readers may think this is a comfortable situation. But in reality, it is not because of inflation and taxes. Your annual pre-tax income, assuming 7%interest rate, is around Rs 7 lakhs. You will fall in the 20% tax bracket. Let us assume the inflation rate is 5%. Your retirement corpus will get depleted before you reach the age of 80. For the last 10 years or so of your retired life, in this example, you may lose your financial independence, even though you were financially comfortable to start with. If your spouse is a few years younger than you, she may have to be financially dependent on your children or other means for even longer.