Retirement, a word synonymous with slowing down, is no longer treated the same way as it was a few decades ago. Today, retirement for many people is the start of a new life as they look forward to pursuing their dreams with free time at hand. Apart from the abundance of time, retirement also means a lack of regular income combined with continued expenses. This combination pushes people to begin planning for retirement, such that all their post-retirement needs are taken care of and they can lead a comfortable life.
The question then is, how can one ensure a sufficient corpus that lasts for the golden years of life? Here, we share the top 10 tips to ensure successful retirement planning.
1. Start early
As per the 4% rule (explained in detail in Pt.3 below), if an individual estimates that post retirement his/her monthly expenses will be Rs. 1 lakh, the minimum investment corpus he/she will need to have is Rs. 3 crores. It can take significant time for many to gather this amount. Hence, starting savings and investments early in life is the key to gaining better yields. Experts suggest starting retirement planning as early as in 20s to maximise the corpus. The power of compounding can ensure that one has enough money to deal with inflation by the time retirement approaches.
2. Set aside more funds than needed
Based on one’s current and future career plans, one can have a fair idea about the retirement age and income until retirement. This can form the base information for estimating the funds required to cover for expenses post retirement. While planning for the funds required, it’s better to set aside more funds than one may actually need. This will help in avoiding any financial stress later in life since many people prefer to take early retirement and general life expectancy has risen, resulting in a longer retirement period.
3. The 4 per cent rule
While investing for retirement, it is crucial to keep a track of the potential income the investment will generate. Adopting the 4 percent rule can help in this case. According to this rule, a retiree must aim to withdraw up to 4% of his/her portfolio each year post retirement to allow the retirement funds to last a minimum of 30 years. This conservative approach helps in avoiding extra withdrawals from the retirement corpus and ensuring that it doesn’t get exhausted prematurely.
4. Carefully select savings and investments options
One can find various savings and investment avenues in the market, however, choosing one or a few of these options may be challenging. For this, one has to carefully and thoroughly evaluate shortlisted options. Two factors that can aid better decision-making are individual risk appetite and investment horizon. For example, one can plan an investment portfolio such that it is equity-heavy early in life and switches to a debt portfolio as one ages.
Investment options for retirement corpus
Some of the options that individuals can consider for setting up a safe retirement corpus are:
- Senior citizens savings scheme
- RBI floating rate bond
- Kisan Vikas Patra
- National pension scheme
- Debt mutual funds
- Public Provident Fund
5. Include real estate in portfolio
Another investment tip to use for successful retirement planning is to own a property that can fetch rental yield in retirement. With multiple assets, one can earn a higher rental income. Since rentals increase each year, this source of income can help a retired individual stay financially in tune with rising inflation. A property bought at a younger age can also be sold to get additional capital for retirement.
6. Manage debt appropriately
It makes sense to clear off debts at the earliest while planning for retirement. Repaying debt as per schedule ensures good financial hygiene and minimises risk of using up savings that are kept aside for retirement. Unpaid dues attract a high interest rate and hamper retirement planning.
7. Allocate sufficient funds for medical expenses
Many times, people underestimate the amount of money that will be required for increased medical expenses post retirement. Medical problems can go up significantly with old age and since health care expenses are on a rise these days, one must make sufficient provisions in the form of medical insurance and savings. Taking note of the family’s general wellness, medical history, genetic disorders and preferred hospitals for treatment can give a realistic idea of financial requirements after retirement.
8. Consider family’s financial dependency
While planning for retirement, it is important to consider the financial needs of family members who may outlive the retiring individual. Dependents who are younger and healthier will possibly outlive the retiring family member. Therefore, one must create sufficient financial security for such dependents while chalking out a financial plan for retirement.
An insurance policy for the family can take care of the dependents’ financial needs even after the retiring individual is no longer alive.
9. Track progress
No plan is complete unless one monitors its progress and fixed any flaws while doing so. It is therefore essential to closely review the retirement plan from time to time such that necessary adjustments can be made to expenses, savings, and investments.
An important aspect to remember here is that one’s financial situation continues to change with time. With growing age, one may move towards higher salary jobs or earn more from a business. Thus, the saving capacity rises and so does the capability to invest more.
10. Never miss insurance
Since there is a lack of government support when it comes to retirement finances, individuals working in the private sector or those owning businesses must get sufficient insurance cover for self and family. Apart from the health insurance mentioned earlier, house and life insurance are equally crucial for sufficient financial back-up.
Retirement planning is no small task as it can take up a few decades to wisely set aside sufficient funds for retirement. However, it is never too late to begin planning for retirement. For a stress-free and comfortable retirement life, an individual must aim for a flexible portfolio while maintaining a good balance between lifestyle and return expectations.
You can invest in retirement mutual fund schemes that have portfolios designed to balance risk and rewards to meet retirement goals.
Yes, you can invest in equity for building a retirement corpus. However, equity should be a part of the overall portfolio comprising other investment options like debt, real estate, etc. It is also important to reduce equity component in the portfolio as you near retirement.
Many people opt for early retirement since they have a financial plan in place to cover for retirement expenses. If opting for early retirement, one must ensure to have a strong stream of income and sufficient capital that will cover a longer retirement period.
Since inflation results in rising prices of products and services, the finances set aside for retirement may deplete faster. Therefore, one must invest in avenues that offer inflation-beating returns, like equity, to ensure sufficient finances for retirement.