How should you plan financially for retirement?

“It’s too early to think about all this, I’m only 25 now.”
“I’ve already saved enough for retirement”
“I might not retire at all!.”
“Retirement is not a big deal”
“I want to retire by the time I’m 45.”
“I am not planning for anything big during retirement so I think I‘ll manage.”
“I’m saving up sufficiently in my bank account so it’s all good”

No matter which of the above statement resonates with you the most, retirement is a financial truism that everyone needs to be aware of. It looms ahead for everyone and is a non-negotiable goal for all of us. And it is relevant today - no matter who you are or how old you may be. Experts agree that it is never too early to start saving for your retirement. We are living much longer, healthier lives these days, so retirement from work at 60 could be followed by many years of an active life. So while you’re planning till you turn 80 how will you maintain your lifestyle if you end up living even longer? Will you have the money to support yourself and your family for an additional 10, 15 or even 20 years? And have you considered that all the medical advancements over the years are not only making it possible to identify and deal with more and more medical problems much earlier, but also means that our life spans are increasing drastically.

Investing wisely helps. With the power of compounding by your side, even if you are only investing a modest amount, you could be well on your way to build a healthy corpus of money. Investing the same amount, but starting earlier, can make a difference to your wealth creation and returns.

As an example, let us consider 3 people who are of different age groups, and the amount of money they will need to put aside for their retirement, keeping their monthly expenses in mind.

Their target retirement age is 60, the underlying assumed inflation rate is 6%, and their life expectancy is 80 (don’t forget that average life expectancy is increasing all the time). On their investments, we have assumed a 15% rate of return before retirement; when they retire this will falls to 8%, as often at retirement it is advisable to switch all of your investments to low risk products. The calculations look like this:

As we can see, since Tanya started investing 30 years before retirement, she would only need to invest Rs 5,172 each month to build the required corpus for retirement as compared to Varun who started investing 10 years before retirement and would need to invest more than 98,000 thousand each month to build the required corpus for retirement. The combination of the power of compounding, along with the virtues of starting to invest early and remaining invested for the long term are what gave Tanya the advantage. Therefore, it is advisable to start early when you are building a retirement corpus.

Factors to consider when planning for your retirement:

The same factors that are important to consider when you invest generally come into play here, along with the following additional key aspects:

• Current age and planned age of retirement: If you are starting to invest in your early twenties, you may be comfortable with a higher element of risk. If you are starting to invest in your forties, you are likely to want to take on a lower level of risk. In the latter case, you are nearer to retirement so you have less scope to recoup any losses. Therefore, the allocation you make in your portfolio towards equity and towards debt, will keep evolving as you grow older.

• How long do you expect to live after retirement? It is common to see people retire in their 60’s and have long and active lives well after this as we continue to see medical advancements. In fact, some experts suggest that the person who will live till the age of 150 has already been born. While this is great news if you look at it independently of anything else, would you have enough money to maintain your existing lifestyle if this were your situation?

• Current and projected income and expenses: What are your current and projected income and expenses? Some experts say that to maintain the same lifestyle as you have today, you should plan to build a retirement corpus that can help generate regular interest or a value equivalent to at least one-half to two-thirds of your current income, for your entire life post retirement.. Remember you won’t have an actual income once you retire, hence your investments will have to do all the earning for you! Be aware of which costs will increase and decrease. For example, your expenses may go down if you no longer live in the city, or rental estimates may disappear if you live in your own house by the time you retire. Other costs may increase, for example medical expenses.

• Rise in prices/projected inflation: As you are planning for the future, consider how costs are constantly rising, thereby increasing your cost of living. For example, in 1994, milk cost Rs 9 per litre; now, it is about Rs 60 per litre. Over time, costs increase, therefore the value of your retirement fund must also factor such increases to allow you to beat inflation. This is one of the main factors why you should start investing early.

Steps to build a retirement corpus

Now, if you’re smart and have done your calculations well, you may already have a fair idea how large your retirement fund needs to be. So let’s figure out in a few simple steps how you can build it.

• How much can you invest over the years? First, make a realistic estimate of what is the amount you can realistically afford to add to your retirement nest egg now and additionally every year as your salary increases with time, over the rest of your earning years.

• How much do you expert to earn? As you research investment options, calculate an assumed rate of return on the money that you are investing. Use this assumed rate of return as a benchmark by which to measure the success of your potential investments. Be realistic about your estimates and don’t forget to account for lifestyle changes as you move through the different stages in life, such as getting married, having kids, planning for their needs and so on.

• Where all can you invest to earn retirement income from? And finally, think about where all can you invest today, to earn your retirement income tomorrow. Understand your risk profile and figure out an appropriate asset allocation for yourself, which can realistically help you earn returns that will be sufficient for you to get to your retirement corpus. Once you’ve identified the right proportion of equity and debt, think of the various instruments you can choose from to gain access to these asset classes. You can then learn more about those instruments, and begin investing straight away. An expert investment advisor can help you plan your retirement journey very well. You may find that investment advisors suggest that Systematic Investment Plans in equity mutual funds are a great way to earn potentially big returns to build a retirement corpus over the long term.

Retirement is a key milestone, a key phase in everyone’s lives, especially if you’re working today or even if you’re running your own business. While everyone can benefit from a few simple ideas when it comes to planning for retirement, the real advantage is in the hands of the young ones- the ones who are in college and are just about getting ready to earn their first incomes. With time on their hands, all it will take is the first step to put them along to a happy and secure financial future. Think about this - would you rather be someone who says in a few years from now: “I wish I’d started early when it came to planning for my retirement” or do you want to be the one showing people how you actually did it, and benefited from it?