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Financial planning: For old times’ sake

Jan 28 2014, 09:31 IST
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Retirement planning is a crucial part of financial planning that is gaining prominence today on the back of increased life expectancy and rising inflation. Retirement planning is a crucial part of financial planning that is gaining prominence today on the back of increased life expectancy and rising inflation.
SummaryTo make the golden years unforgettable, you must have a sound retirement plan in place. A ready reckoner.

Retirement planning is a crucial part of financial planning that is gaining prominence today on the back of increased life expectancy and rising inflation.

The corpus you build for retirement should be able to help maintain the desired lifestyle after you stop working. Many times, you realise that the corpus you wish to have on retirement may not be achieved with your current and planned savings. The earlier you recognise this shortfall, the better, as it will help you reach the goal more efficiently.

Before we look at what can be done if you fall short of the retirement corpus, let us briefly examine the broad steps to be followed to determine the corpus amount. First, you must baseline your current expenses under different expense heads and estimate how much of these expenses you are likely to incur post-retirement also. For example, while you are not likely to have loan repayments, your medical expenses may go up after retirement.

Decide your retirement age, which is 58 years in most companies. Some people would like to retire earlier, which must also be factored in. Also, factor in a life expectancy of 70-80 years. Next, add the inflation factor to understand how much your expenses will grow to between now and at the time of retirement.

Make assumptions on the returns you are likely to receive on your investments till you retire and after that. You can then calculate your retirement corpus with the above inputs by using retirement calculators or doing it yourself on an excel spreadsheet.

After determining the corpus required, you can assess whether you are comfortable getting there with your current and planned investment patterns. If you think there will be a shortfall, you can consider the following options:

Increase savings: The first step would naturally be to increase your savings between now and when you retire.

Save in high-yielding instruments: Equity is the best option over the long term. It gives higher returns than typical retirement avenues like Provident Fund and fixed deposits. Consider investing more of your retirement savings in equity mutual funds. When you near retirement, you can gradually de-risk to debt instruments. Even post-retirement, you can consider investing partially in equity or balanced mutual funds, if your risk tolerance permits.

Review expenses: Very often, people don’t realise that some expenses may not be incurred after retirement. Therefore, carefully analyse what you are likely to incur after

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