Retirement is a new journey of life that helps you experience a different phase with a new kaleidoscope. How smoothly it goes depends on how well you have executed the planning phase.
Anup Bansal, Chief Business Officer, Scripbox points out, “Two of the most important components of having a worry-free retirement life are: a) Investing and planning for retirement and b) Efficient withdrawal planning from retirement funds.”
Investing and retirement planning
It is always better to start investing and saving for your retirement from an early age, i.e. once you start earning. According to industry experts, this will give you a long time horizon to invest in a small amount regularly and yet create a sizable corpus when you retire.
Bansal explains, “When starting early, you may have some vague idea about your expenses (inflation-adjusted) at the time of retirement. Still, as you near retirement, you will be more clear about how best to estimate the required expenses to sustain your lifestyle and the resultant corpus.”
Additionally, you should consider inflation while planning for your retirement. For May 2022, the annual inflation rate in India was 7.04 per cent so you may use historical numbers for the planning and keep revising as years go by.
“You should make sure that the investment instruments you are choosing help you with gaining returns at or above par with inflation. The planning may assume an extra return that you will earn over inflation in your calculation of the corpus,” adds Bansal.
Note that, the higher the extra return assumed, the smaller is the regular savings required so it is important to be conservative and assume no more than 1-2 per cent return over inflation at any point in time.
Efficient withdrawal rate from retirement funds
Once you retire, the ultimate goal of your investment funds is to provide you with a regular income. However, deciding at what rate you should withdraw funds to avoid outliving it, is a challenge.
Bansal explains, “While the withdrawal rate is directly related to your income requirements, in general, a 4 per cent withdrawal rate is considered ideal. It is also called the 4 per cent rule of retirement.”
You can also opt for a systematic withdrawal plan (SWP) to ensure an efficient way to withdraw funds from your retirement corpus without the consequences of running out of it.
Bansal points out, “It not only allows you to enjoy a regular income inflow, but your remaining fund stays invested and continues to grow, yielding returns. You should calculate the lifestyle cost of your post-retirement life and decide on a withdrawal rate for efficient planning of your latter days.”