Your Way To Retirement

By | November 2, 2016


When you hear the word ‘retirement’, what is the picture that comes to your mind? Is it you lazing around your house? Or you frantically looking for an after-retirement job because your retirement corpus is just not enough? If you have your sunset years planned, you can have a peaceful post-retirement life.  If not, you will remain worried for years after retirement.

Even if you are going to receive a pension, it may not be enough if you lead a lavish lifestyle. It is indeed an illusion if you think your pension will be good enough to meet contingencies that might come up when you retire. These emergencies might include health costs if you fall ill or have a chronic disease. You also need to take into account inflation. Rs. 1 crore might seem like a good retirement amount today, but will it be enough 20 years down the line? You really need to think about it. Here, we give you some pointers on how to plan for your retirement. Read on.

Pre-Retirement Questions Answered

We try to answer some of the questions you might have regarding saving for your retirement. You really need to understand the answers before you start saving for your golden years.

  • How much do you need for retirement?

This is the first question that will come to anyone’s mind when they start saving for retirement. How will you estimate this? If you are a working individual, the amount of money you will need every month during retirement will broadly be equal to what you spend in the years immediately preceding retirement. However, this may not apply to everyone. For Government employees and some other privileged employees, food and accommodation may have been free before retirement.  Even medical facilities may have been provided free of cost. Now, for these people, it becomes really tough to estimate their retirement needs. They need to plan for their retirement even more carefully than others.

Estimating requirements – Essentially, you should contact a financial planner who will be able to give you an idea of how much you will need once you retire. However, if you are working it out on your own you can make use of retirement calculators. But be sure to take inflation into account.

Let’s use an example to understand this better. Let us assume you are 30 years old and plan on retiring in another 30 years. Let us also assume your yearly expenses are Rs. 4,80,000. You incur medical expenses of Rs. 25,000 per year and you plan to go on pilgrimages and vacations for which you think you will spend Rs. 2 lakh (at today’s prices). Based on these figures, how much will you need on retirement?

Believe it or not, you will need approximately Rs. 5.9 crore. Yes, it’s true, especially if you consider inflation to be about 6%. In fact, you will need Rs. 5 crore for your monthly expenses alone. If you want to save for such a corpus, you need to invest Rs. 5.85 lakh if your investments fetch you 7% per annum, or Rs. 3.2 lakh if your investments earn you 10% per annum. And this is without taking into account the emergency fund that you will need. Make use of a ‘time value of money’ calculator to find out what the value of today’s expenses will be many years down the line. This way you can see if the retirement calculator is churning out the right numbers. You should ensure that you have sufficient funds for a stress-free retired life.  If the funds are inadequate, you might need to step up your retirement savings, or you might even have to stretch your work life.

Make use of a ‘time value of money’ calculator to find out what the value of today’s expenses will be many years down the line. This way you can see if the retirement calculator is churning out the right numbers. You should ensure that you have sufficient funds for a stress-free retired life.  If the funds are inadequate, you might need to step up your retirement savings, or you might even have to stretch your work life.

If you are in your 30s and still have big ticket expenses you are saving for – like your child’s higher education and marriage – you might need to do an estimate once again after these expenses have been done away with. Ensure that you don’t dip into your retirement savings to meet these expenses. If you decide to opt for a career after retirement, enhance your skills by attending courses and getting yourself certified in the area in which you intend to work. Ideally, you should start saving for retirement as soon as you start working, or at the very least begin as soon as you get married.

  • What are the investments you should make?

This should be the next million dollar question on your mind. Since retirement is a long-term goal, you must invest in riskier instruments so that you make higher returns. The best investments will be stocks, Mutual Funds, Public Provident Fund (PPF),and long-term bonds. It doesn’t matter whether the investment is liquid because you are saving for the long run. If you are running a tight budget, start with a small amount and then step it up every year. You must try to increase your retirement savings by at least 5%-10% every year. Make sure that you review your investments once a year and don’t let your equity investments form more than 40% of your portfolio after you hit 50 years of age.

  • What are the implications of investing?

There are a multitude of financial products available today and understanding all of them is not easy for a lay investor. The best way to go about it is to invest in products that are well regulated. These will include bank Fixed Deposits (FD) and Mutual Funds. Stocks are also well regulated, but you will need to do quite a bit of research if you are investing in small stocks. Don’t take on products that are not transparent. These include products such as chit funds and money saving schemes by companies. As a senior citizen, you may become distant from the financial world, which is why you need to be even more careful. You need to make every effort to understand the product that you are investing in, the risk implications and also the tax implications. It is crucial that you read the terms and conditions carefully, especially for products such as Unit Linked Investment Plans (ULIP).

Planning as per your age

Retirement planning will differ based on the age at which you start saving. Here are some tips on how to go about it.

In Your 20s

This is the age at which you start working and is also the right time to begin your retirement planning. Think it’s too early? Don’t even go there! It is never too early to start saving for your retirement. In fact, the earlier you start, the larger the corpus you can accumulate. Consider this: If you save Rs. 10,000 every month for 40 years, you will have Rs. 6.4 crore when you retire. Suppose you save Rs. 20,000 after you turn 30, will you have more? Of course not! You will have only Rs. 4.6 crore when you retire even though you saved double the amount every month. This is why you need to start early.

You can save more when you are unmarried. This is because you will hardly spend on essentials. You can save most of your salary if you don’t make many extravagant purchases. You can invest in riskier assets at this stage. Mutual funds are the right way to start. Once you are comfortable, you can move to equities. In case of equities, you should look at big companies or large cap stocks initially. Invest in as many assets as you want since your liabilities will be at a minimum at this stage. But don’t go for unregulated products or products that are not transparent. At this stage, you can afford to invest as much as 50% of your salary for retirement. Link your investment to retirement so that you are not tempted to dip into it for any indulgences.

In Your 30s

It’s possible you’ve tied the knot by this time. If you’re also planning on having kids but you haven’t started saving for retirement, well that’s too bad. You should be able to estimate your expenses well by this stage so that it becomes a habit every month. This makes it easy for you to allocate an amount for your retirement. You can tweak your expenses to ensure that you save for your retirement. It doesn’t matter if you are looking at buying a house or a luxury car. Your retirement savings should be given top priority if you want to save a decent amount by the time you retire. Your 30s are the time when you will earn more than a few salary hikes. Use them to step up your retirement savings. If you have a plan in place for your bonuses and incentives, you should be well on your way towards building a hefty retirement corpus.

It is crucial that you create a monthly budget to avoid unnecessary expenses. Also, ensure that your debts don’t cross 50% of your take-home pay. For example, if you purchase assets totaling Rs. 20 lakh, you should not borrow more than Rs. 10 lakh. Ideally, loans should form about 30% of your salary and not more than that. This will help you avoid debt traps. Do not use your retirement money for any other goals.

In Your 40s

Some of you may have two decades of work experience under your belts by this time. You also may have received several promotions along with salary hikes. You should be well-settled in your career since the expenditure for your kids will be on the higher side now. Ideally, you should have finished purchasing all your assets, such as a house for example. You should also be well on your way to closing your loans. It is always advisable to avoid taking new loans at this stage.

Your child’s higher education might be one of the biggest expenses at this juncture, which is why you should have saved up for it. Do not use your retirement corpus for this purpose. If you are short of funds, consider an Education Loan. Using retirement funds will lead to a great shortfall in your retirement corpus, and it will not be easy to replenish the funds since you will have less than 20 years to meet your retirement goals. You can continue to invest in high-risk assets such as equities and Mutual Funds. It is important that you prioritise your goals at this stage.

Given the multiple goals that you will need to fund by the time retirement comes around, you need to give utmost priority to your retirement savings if you don’t want to be dependent on your children after you retire.  You can choose to invest a little less for your retirement, as goals such as your child’s marriage near. However, never stop investing for your retirement. If you are forced to retire or are rendered jobless during this period, get another job as soon as you can. Never start your own business just because you lost your job and have retirement funds on hand. A business venture at this time of your life could prove to be risky.

In Your 50s

You are just a few years away from your retirement and you should have accumulated a sizeable corpus by this time. All major expenses such as your child’s education and marriage should be behind you. You can concentrate on stepping up your investments for your retirement.  Many of your investments might be at the maturity stage by now. Consider tax implications and liquidity issues before you reinvest the money you receive on maturity. This is also the time to increase your emergency funds so that you are ready to meet any possible contingencies.

You should also start investing in instruments with lower risks since you only have a few years to go before you finally retire.Decrease the risk quotient of your investments while increasing the liquidity quotient. You don’t need to cut down your equity investments until you reach 56 years of age. If you want to meet rising healthcare costs and beat inflation, remaining invested in equity is important. You need to do some tax planning to save as much money as possible. If you have too many investments, this is the time to consolidate them so that it is easy to keep track of them after retirement.

In Your 60s And Beyond

This is the time to invest in instruments that have low risk and are liquid. You don’t need to stop investing in equities, but you need to cut down your exposure to them considerably. It is best to invest in investments that give you a regular income. These include fixed-income investments such as post office schemes, bank FDs, Government securities and bonds. Be careful when you invest in company deposits, even though they might give higher returns, as they can be illiquid. You can consider reinvesting your income payout from other investments in case you don’t plan on spending that money. For instance, you can reinvest interest income from your FD in fixed-income schemes of Mutual Funds. You also need to understand that you run the risk of outliving your retirement corpus in case you are really healthy and maintain a good exercise regimen. You need to have enough money to last a lifetime.

You must continue investing in equities because life expectancy in India has risen and stocks are known to give the best returns in the long-run. Also, save accordingly and invest as much as you can. Always compare your expenses and income and check if you have any additional surplus that you can invest.

You should try to minimise your tax outflows at this stage. So, invest in tax-efficient products with minimal lock-in periods. Never take Personal Loans at this stage. If you really need funds, consider taking out a loan against your FD, or you could even liquidate some of your investments. You must roll-over investments that mature. Keep track of them so that you don’t lose money by keeping them in your savings account.You should never use investments that have matured for indulgences such as vacations. Once you are over 75, you need to keep most of your investments liquid. You can do away with equities at this stage.

After retirement, you need to shift these investments to instruments that have the following features. It is best to make the shift gradually as you reach your retirement. Ideally, you should start doing that 5 years before retirement.

  • Liquidity – When you become old, medical expenses tend to go up and emergencies are a possibility. You need to keep a good part of your investments liquid so that you can access your funds when there is a need. Remember, the more liquid your investments are, the quicker you will be able to access them. Before choosing these investments you need to make sure that there are minimal penalties for withdrawal. Consider Mariam. She is 62 years old and had invested a chunk of her money in bank Fixed Deposits (FD). She was diagnosed with an ovarian cyst and had to be operated on immediately. For this purpose, she needed Rs. 3 lakh urgently. Thanks to her investments in FDs, she managed to pay the operation bills by liquidating her FDs with minimal penalties.
  • Beating inflation – It is imperative that your investments beat inflation, especially after your retirement. What does ‘beating inflation’ mean? Essentially, the returns from your investments should be much higher than the prevailing inflation rate. Suppose the return on your investment is 10% and the inflation rate is 7%. This means your actual return is about 3%. If you invest at a rate that is below the inflation rate, then you are actually losing money.
  • Stream of income – When you retire, you would certainly like to receive a steady stream of funds. Invest in instruments that will give you monthly or quarterly income. This will help you maintain a decent lifestyle after retirement. Choose payout options based on how frequently you will need money in your hands.

You need to choose a mix of good investments such as bank deposits, Government bonds, tax-free bonds, Senior Citizens Savings Scheme (SCSS) and company deposits.

How To Create Regular Income

You will not receive a steady income after retirement unless you take up a job or are receiving a pension. Even if you do receive a pension, it will not be the same as your salary. It may be a lot lower in comparison. Inflation will also ensure that the value of your pension is not much to talk about.

The best way to supplement your pension or receive income like your salary is by setting up investments in such a way that they provide you with a regular income. You can set them up to provide you income that suits your requirements. Ideally, you should be doing this in your 50s when some of your long-term investments start to mature. Plan your reinvestment in a way that you receive a steady income from these investments after retirement.

Here are some options that you can consider:

Income ladders – You can create an income ladder by investing in instruments that mature at different points in time. You can consider investments such as the National Savings Certificates (NSCs) or tax-free bonds that are less risky and give you a pre-determined sum on maturity. When you invest in instruments at different points in time, you keep receiving money throughout the course of your retirement. In fact, you can do the same with your FDs.

Annuities – This product was designed for those who will not receive a pension after their retirement. You can receive a regular income by investing in annuities offered by insurance firms or Mutual Fund companies. Generally, people buy annuities using their retirement fund. You can also consider SCSS offered by the post office. This is one of the best sovereign investments for retirees. You can make investments of up to Rs. 15 lakh and receive interest at the rate of 8.6% per annum. The investment amount is eligible for a tax deduction under Section 80C of the Income Tax Act. The Post Office Monthly Income Scheme (POMIS) can also be considered. This will provide you with an interest of 7.8% per annum. However, note that there are no tax rebates for this product and the interest is totally taxable.

Systematic Withdrawal Plans (SWP) – You can use the SWP facility provided by Mutual Funds to withdraw money from your debt funds. To set up this regular income, you will need to make investments in a debt scheme of a Mutual Fund. Choose a fund with a decent track record and considerable Assets Under Management (AUM). You need to wait for 3 years to avail of the facility if you want to take advantage of the indexation benefit for the long-term capital gains that you might make.

Monthly Income Plans (MIPs) – You can look at Monthly Income Plans (MIP) offered by Mutual Funds. These are plans launched with the aim of providing regular income to investors. An MIP generally invests 80% in fixed-income instruments and 20% in equities. So, you can be assured that your investment is not subject to high risks. The equity portion will give a fillip to your returns. However, note that MIPs have some disadvantages too. Since these plans invest up to 20% in the stock market, they may skip dividend payments when market conditions turn adverse. This could decrease your monthly income.

Setting up a regular income is not enough. You need to be mindful of taxes associated with your investments.  It is not uncommon for individuals who have just retired to find that they have to pay huge taxes on their retirement funds. Remember that large tax outflows can have an adverse impact to the longevity of your retirement funds. You can avoid this if proper tax planning is done much before you actually retire. You need to ensure that your tax outflow is at a minimum. Note that there may be taxes on interest as well as on maturity. Ask questions regarding taxation before you decide to make any investments. Also, keep Form 15H handy in case you are below the taxable bracket. This will help you avoid Tax Deducted at Source (TDS).

Retirement Housing

This is a big question for every retiree. Will you have your own house or will you be living with your children? This is if you don’t have a house of your own already. Ideally, you should have purchased a house by the time you hit your 40s. This is because most Home Loans don’t allow you to repay the loan after you retire. The maximum tenure for a Home Loan is usually 25 years. Even if you have purchased a house, there are other dilemmas. Suppose you have a house in the city you currently reside in. You have intentions to move to a smaller town after retirement. Now, you need to decide if you will pass this house on to your heirs and buy a new one, or sell the house in the city and buy a new one in a small town. You need to make these decisions as quickly as possible so that your finances after retirement don’t get affected.

Consider the example of Raghav who is 50 years old and wishes to live in the suburbs. With 2 kids, Raghav had purchased a house in Coimbatore in his 30s. He had plans to purchase a second house in one of the metros near a good hospital. This was because he had an ailing mother who required frequent hospitalisation. He estimated that Rs. 40 lakh would be a good sum to buy such a house. But Raghav kept postponing the purchase.  He decided to wait for prices to fall further in the city. With just 6 years to his retirement, he started to frantically look for a house. But real estate prices had escalated so much that independent houses in the city where double that of the price he had in mind. Even apartments were expensive. He had only Rs. 35 lakhs to spare. He had no choice but to settle for an apartment 25 kilometers from the city near a low-profile hospital. If he hadn’t postponed his purchase, he would have a good apartment to stay in and the price of the property would have also appreciated.

Even if you have a house of your own, you might want to live with like-minded people or where there are facilities that will help you in your golden years. You can look at retirement housing units that have sprung up all over the country. These come with the best of facilities for the elderly. Ideally you should be living near your children who can help you during periods of illness. If that is not possible, choose a retirement home with all possible amenities such as round-the-clock medical facilities and 24-hour security. You could even lease these places. But keep in mind that you will not be able to sell the property if you do that.

Old-Age Healthcare Costs

Illness comes hand-in-hand with old age. Unless you are a fitness freak, you might be susceptible to illnesses as you grow old. You need to have sufficient funds to meet medical expenses. When deciding on your retirement corpus, you should keep in mind medical expenses you might incur after retirement. If you already suffer from lifestyle diseases such as diabetes, you will know the possible expenses you might incur for the same. Align your investment plans in such a way that you will have a corpus for meeting medical expenses. Also, note that, in your later years, you could be diagnosed with an illness that could turn out to be chronic. You will need to take into account your health condition and the cost of treatment to determine how much you should allocate. It is best to keep a chunk of your money as a medical corpus rather than dipping into your emergency fund whenever you fall ill.

With healthcare inflation being much higher than normal inflation, you need to make special investments to ensure that you have adequate funds after retirement.  If you find that the corpus may not be enough, step it up during your working years. Prioritise your goals and give utmost importance to your medical corpus.

A medical cover is a must for you as well as your dependents. It is best to take medical insurance while you are still young and healthy. Premiums will be low then. You can save quite a bit by using your medical cover for meeting healthcare costs during your working years. Keep paying the premiums on time every time so that the policy remains valid. Premiums are not hiked significantly if you don’t make claims and have no major illnesses. Note that Health Insurance is expensive after you turn 60. Premiums could be very high and not affordable at all. So, it is better to save rather than take an insurance policy after you turn 60 years.

Consider the case of Sahaj, who purchased an insurance policy when he was in his 40s. He was diagnosed with a heart disorder and had to undergo an operation. He needed Rs. 3 lakh for the same. Thanks to his insurance policy, he got Rs. 2.5 lakh sanctioned and had to put in only Rs. 50,000 from his pocket. His hospitalisation expenses were also covered under the policy. Without the policy, he would have had to shell out a huge sum which might have affected his retirement corpus and other goals.

Once you understand the key concerns regarding your retirement, you will have to take stock of your financial situation. You should have a clear idea about all your assets and liabilities. You should be free of liabilities by the time you retire.

Counting Your Assets and Liabilities

Put all your assets in a single portfolio. It will be easy to track. Though you may have invested for different goals, consolidating all of them in one place will help you take quick decisions when needed. Reviewing them will also be easy. You can review and reallocate conveniently when you have all your assets in one place. Having separate portfolios could mean overlaps, where you invest in the same investments or similar investments and are over exposed to that investment. Your investments should be spread across asset classes to minimise your investment risks. Regardless of the number of investments you may have, you must ensure that they meet your need for a regular income. This can be in the form of dividends, interest pay-outs, or annuities as mentioned earlier. Earmark these investments and keep them separated from others. Your portfolio must be diversified and should contain investments that suit your profile. You should be able to manage all of them after your retirement. Ensure that you have all kinds of assets, including equities, fixed-income securities such as National Savings Certificate and PPF, and also insurance. The percentage of each asset class will, however, differ according to your risk profile and financial position.

Consult a financial planner if you are worried that your investments are not on the right track. Do the same exercise for your liabilities. Ideally, you should have closed off all your loans at least 10 years before you retire. This will help you step up your investments as you near retirement. If you still have loans, make a plan to pay them off by the time you retire.

Now that you know how to plan for your retirement why not start now? Begin with Fixed Deposits and then move on to Mutual Funds before taking on more complicated investments. You will find that you will have accumulated quite a bit in a short time.

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