Financial planning: For old timesí sake

Adhil Shetty Posted online: Tuesday, Jan 28, 2014 at 0000 hrs
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 donít realise that some expenses may not be incurred after retirement. Therefore, carefully analyse what you are likely to incur after retirement. Also review expenses to see if you can optimise on some of them after retirement, which can bring down the corpus required.

Reconsider your retirement age: Evaluate if you can work beyond the retirement age of 58 years to boost your income. You can also look at working part-time after retirement to bring down the net cash outflow and reduce the corpus required.

Evaluate all sources of income: During retirement, having a regular source of income assumes importance. Most people do not plan this out during the working years. You can invest money in bonds or fixed deposits, which give a regular payout. Or, you can build a regular income from a second home in the form of rental income. Although it is important not to completely depend on rental income, it will reduce your retirement corpus needs. Also, remember to consider all income streams like inheritance or any other sizeable one-off income that you may receive.

Review other goals: Review your other financial goals and see if you can work around saving more for retirement. For example, instead of funding your childís education completely, you can look at partly funding it and asking your child to take a loan for the remaining amount. This can free up more savings towards retirement.

Reverse mortgage: You can consider reverse mortgage of your house as a backup. This means if you are a senior citizen owning a house, you can mortgage this with a bank in exchange for a regular payment. Although this concept is popular abroad, it has not caught up in India yet, as the bank has the right to sell the property after the borrower passes away to recover the loan.

You can discuss with your children the option of staying with them after retirement, which will bring down expenses for all of you. However, with the concept of nuclear families becoming popular, this may not be very feasible. Remember to always keep your risk tolerance and risk profile in mind when you invest. The need to earn higher returns must always be weighed against the risk you are willing to take, and an appropriate balance must be struck before choosing any option.

The writer is CEO, BankBazaar.com

Looking ahead

* Increase your savings between now and when you retire

* Consider investing more of your retirement savings in equity mutual funds. When you near retirement, you can de-risk to debt instruments

* Review expenses to see if you can optimise on some of them after retirement

* Reconsider your retirement age. See if you can work beyond the retirement age of 58 years to

boost your income

* Evaluate all sources of income: You can invest money in bonds or fixed deposits, which give a regular payout. Or, you can build a regular income from a second home in the form of rental income

* Review your other financial goals. See if you can work around saving more for retirement. For example, instead of funding your childís education completely, you can partly fund it and ask your child to take a loan for remaining amount