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Thursday, August 22, 2013

Plan your retirement, maintain your lifestyle

We have seen India change over the last two decades. Notably there has been a change in the lifestyle of the working population. The purchasing power has increased considerably and so have the expenses. 

An improved lifestyle, better healthcare and medical facilities have led to increase in the lifespan of the average Indian. In the past, a salaried person would retire at 60 and live up to the age of 67. However, now the lifespan of an individual post-retirement has increased by at least 20 years. This implies that an individual needs to have sufficient funds to be able to lead a comfortable life once one stops working. 

If a person spends Rs 25,000 a month today, assuming an inflation of 7%, his expenses after 25 years will increase to Rs 1,36,000 a month. Add to this the medical expenses, which increase with age and occasional expenses such as gifts - it could actually exceed Rs 1,50,000. 

Most private sector companies do not provide pension. Additionally, the rising trend of nuclear families, increasing cost of healthcare, inflation etc. - all these factors make it necessary for an individual to plan for retirement. 

The objective is to have a regular flow of money after retirement that will enable one to manage the increased expenses without compromising on their lifestyle. 

Today, consumers have access to products which enable them to plan for their retirement. While awareness levels for retirement planning are high, most of us delay investing for it. Starting at an early age can significantly enhance realisation of an individual's dream to achieve financial independence in the golden years. 

When is the right time for me to start retirement planning? 

Well, in case of retirement planning, it is said 'the earlier the better'. However, it is never too late either. Starting early gives you the benefit of time, which coupled with the power of compounding, enables you to create a sizeable corpus that can enable an individual to take care of the expenses when income from profession stops. Let us look at the table below for two different ages (to start retirement planning) and see what you can expect by the time you are 60. 

Though the amount required to be invested is more if you delay your planning, the key word is 'regular investment'. It is only through regular disciplined investments that you can put aside a corpus that will generate enough income to enable you to live your life comfortably after retirement.
How do I plan for my retirement? 

Retirement planning can be done in 3 simple steps: 

Step 1: How do I calculate my expenses post retirement? 

Take into account your current expenses and factor in aspects like inflation, increased medical costs, vacations, gifts for family etc. You will then arrive at an amount that you will require for living comfortably once you have retired. You need to keep in mind that inflation will cause your expense amount to increase (even if you are spending on the same items). One can eliminate costs like children's education and rent, if you own a home.

Step 2: What will be the savings pool I need to build? 

Once you have an idea of your expenses you can accordingly establish the quantum of amount (corpus) required to be built - the amount that you need for meeting the expenses. This savings pool will be created taking into consideration the inflation factor. 

Step 3: How much do I need to save now? 

Depending on your financial status determine the funds which can be put aside for building the desired retirement corpus. Start saving now so that you have time on your side and can enjoy the power of compounding. 

If a 35-year-old person wants Rs 50,000 every month for meeting expenses after retirement, he needs to start planning now. 

A corpus of Rs 75,00,000 will be required to generate the desired amount. For this purpose, one needs to invest Rs 10,000 every month in a retirement plan. 

How should I choose a retirement plan? 

Studying the features and the charge structure of a retirement plan is important. Ideally selecting a plan which has a low charge structure enables you to contribute more towards your investment. A good retirement plan would: 

a) Provide returns that beat inflation.
b) Give you the flexibility to choose your investment strategy as per your risk taking ability.
c) Protect your capital from market fluctuations.
d) Inculcate a regular saving habit - to ensure the corpus is built in an uninterrupted manner.

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