“The first step towards getting somewhere is to decide that you are not going to stay where you are.”
This was said by the legend J.P Morgan and those who understand this know that to move forward, you need to start as early as possible. Any financial planning revolves around the objective of reaping profits or benefits in the future.
With retirement planning being one of the most neglected forms of planning, we believe our readers should know more about it and its importance so that they can retire as and when they wish to.
Before we dig deep into formal definitions, you should understand what kind of retirement we are talking about.
Retirement is not taken only when you are not able to work because of your deteriorating health or reaching a certain age but it can also be taken when you are financially sufficient and independent, i.e., you can meet your needs and maintain your present living standards for the rest of your life without having the need to work.
So, retirement planning can be understood as the strategy you choose to get to the point where you don’t need to work without compromising any of your necessities or living standards.
More formally, ‘Retirement planning is the process of planning your income, expenditures, assets, liabilities, and savings in such a manner that you can achieve your current financial goals as well as future goals even if you refrain yourself from working.’
Retirement brings out the concerns of surviving in this expensive world, without having a fixed source of income, and with this, you can come across a lot of medical expenses, which can be hard enough to deal with when you don’t have a source of income to fund your expenses. No one of us is different, but some choose to live a comfortable present only, while some choose to plan for a comfortable present as well as a luxurious and comfortable future.
The choice lies always in our hands.
But these were some theoretical explanations about the importance of retirement planning. And, when you will know exactly how retirement planning can affect you, then we are sure that you will be convinced to plan your retirement as well.
Working in an organization that provides pensions after retirement does ease the process of retirement planning a little bit, but it is a huge misconception that pensioners do not require retirement planning. Here are some of the reasons how a healthy retirement plan can help you out.
Benefits of Retirement Planning
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2.1: Financial Independence |
With uncertainties of life going up and families becoming more geographically mobile, it has become very important to be financially independent. And with increasing awareness about different opportunities available to earn passive income, it is much easier to be free from any dependence on others after getting retired. |
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2.2: Social security |
India being a developing country lacks a social security system, that is, unlike developed countries the Indian Government does not take over the responsibility of a family’s elder members which means, our government does not provide any monthly fixed income to the elderly and therefore, this brings out an inevitable need to have a sustainable retirement plan. |
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2.3: Healthcare expenses |
Post-retirement age brings out the necessity of having decent funds for fair and vital healthcare facilities. Healthcare costs are increasing like never before, making it mandatory to have a retirement plan which can take care of all the health-related requirements. |
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2.4: Estate Planning |
Succession planning is something a lot of people might overlook and the consequences of this can be seen in 66% of civil cases which are being fought in district courts on the matter of land & property disputes and out of these cases, 52.7% of cases are being fought among family members. So, it is very important to efficiently manage and distribute your assets, so that your family and loved ones are secure even without you. |
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2.5: Inflation |
Inflation is inescapable, which means the value of what you have today will be much more than what it is today, eg., what was valued at ₹100 in 1980, is now valued at ₹2,115 in 2022 or we can say that the purchasing power has reduced 20 times in 40 years. Hence, while planning for retirement, inflation is a factor that cannot be neglected at any cost. |
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2.6: Emergency Corpus |
Funds collected for retirement planning can be utilized in any emergency, as the ability to secure the loan post-retirement also reduces. So, it is unavoidable to maintain a retirement corpus. |
It is completely delusional to think that you need to work till the age of 60-65. Those days have gone when people used to retire only when they reached an age beyond which they cannot work. And we are living in a world where people are retiring even at the age of 40. So, if you also wish to do the same. You have to start as early as possible.
There is nothing like one size fits all neither in retirement planning nor in any other financial planning. People have different goals, different aspirations, and different lifestyles for which they strive. But, the secret to a delightful post-retirement life lies in making conscious decisions in the present. As something for nothing is a myth.
If you want to enjoy your future just like you have imagined, then you need to make certain sacrifices today. And the magnitude of these sacrifices will depend upon your timing.
At any time you start your retirement planning, you must start by accessing your risk-taking capabilities at different stages of your life. Starting early not only helps you with the power of compounding but also helps you to make investments in assets that are risky but have a very high potential.
The earlier you start, the lesser, the burden will be, the later you start, the greater, the burden will be.
Seems pretty easy, right?
But, executing and making the right choices and decisions at the right time is the toughest job. It will be difficult to take out the money in your initial days of working for retirement planning.
And if you have things planned well for your retirement then it is your choice whether you want to enjoy its benefits with a lump sum amount or through a monthly fixed income.
After all this discussion, now you might know how crucial retirement planning is, but with that, you might be wondering how much money you need to retire whenever you want.
No worries!
We will explain all this to you in a few simple steps.
3.1: First, decide the age at which you want to retire. You need to understand your retirement goals because when it comes to financial planning or retirement planning.
3.2: A retirement plan is conditional to your age, income, expenses, risk appetite, EMIs, no. of dependents you have, stability of your income, expected investment horizon, and how your money is currently parked in various asset classes.
3.3: Now, as mentioned earlier, do not forget to calculate what you need for your post-retirement life without considering the ‘inflation’ factor.
3.4: At last, you should consider a reasonable rate of interest that you expect from your investments through your investment horizon.
3.5: After all this, you need to consider life expectancy i.e., the minimum age you believe you will live up to, eg., life expectancy in India is around 70 years. So, if a person considers this age, and retires at 50, then he needs to have a retirement corpus that will be sustainable for 20 years.
After having a clear number in your mind that you need after retiring, now is the time we tell you what are the various options through which you can achieve your desired retirement corpus in the easiest way possible.
4.1 Equity-linked savings scheme (ELSS) |
ELSS is a mutual fund that invests majorly in equity and because of the high risk involved, this scheme is suitable for people with a high-risk appetite. With a lock-in period of 3 years, historically this scheme has given returns between 12%-15%, and with this scheme, tax benefits up to ₹1.5 lakh can also be claimed under section 80C. |
4.2 National Pension Scheme (NPS) |
This scheme has market-related risks as a portion of NPS goes towards equities and historically has given returns up to 8%-10%, and in this, the investors need to invest till the age of 60. You can also claim tax benefits if you invest in this scheme, under sections 80C and 80CCD. |
4.3 Senior Citizen Savings Scheme |
This scheme gives a regular stream of income with utmost safety and presently gives an interest rate of 7.40% with a lock-in period of 5 years which can be extended for another 3 years. You can also claim tax benefits on the interest earned by investing in this scheme, under section 80C. |
4.4 Employee Provident Fund (EPF) |
With employer and employee contributing towards the employee provident fund account, this scheme gives a fixed rate of interest of 8.1% and is risk-free. This contribution is carried on throughout the employee’s working period. Employer contributes 3.67% and employee contributes 12% of the employee’s salary towards the EPF account. |
4.5 Employee Pension Scheme (EPS) |
Employees do not contribute to this scheme, only the employers contribute 8.33% of the employee’s salary. However, no interest is declared on an EPS account. Moreover, the pension and the lump sum amount received, both are taxable. |
4.6 Public Provident Fund (PPF) |
This scheme is one of the safest ways of saving taxes and earning fixed returns. This Government-backed initiative gives returns of 7.1% with a tenure of 15 years and tax benefits up to ₹1.5 lakh under section 80C. |
4.7 National Saving Certificate |
This Government scheme is suitable for those who have a low-risk profile and want safe as well as fixed returns. With a lock-in period of 5 years, this scheme can give returns up to 6.80%, and you can also avail of tax benefits of around ₹1.5 lakh under section 80C. |
These were some of the options that you might not be aware of. It is very important to choose the right investment option while investing in your future goals and aspirations. Other than these, some well-known options like investing in equity (share market) or mutual funds, should always be considered.
When it comes to investing in the stock market, you need to have thorough knowledge about it, as the stock market can make or break fortunes. However, you must know that no rocket science is involved in this. And for mutual funds, there are plenty of options but you need to be careful about what you choose according to your goals and risk profiles.
A principle that was taught by Robert Kiyosaki in his blockbuster book Rich Dad Poor Dad should be followed by everyone while investing or while planning and that principle was: KISS - Keep it Super Simple.
Simpler things are easy to execute and that is what you should be focused on. And the cherry on the cake is always the power of compounding. This power can do absolute wonders when you start early. Typically, you should start planning your retirement the day you start earning. Initially, it will be difficult but as soon as you will learn about how the power of compounding works, then you will be amazed and everything will turn out to be pretty easy.
