Post retirement, you can start systematic withdrawals from your mutual fund investment accounts. This is among the more convenient and tax efficient ways to provide regular income in retirement.
Retirement is a time that everyone dreams of when they will relax and be comfortable. Free of the strain of a busy work life and responsibilities towards children, they believe it will be a time when they can finally do all that they always wanted to do but never had the time for. However, turning this dream into reality is easier said than done; it takes a lot of planning. With no income flowing in from a salary or business, it will be your savings that will be the primary source of funds. It is only proper then that adequate time and thought is put into ensuring that your savings are sufficient to sustain you through retirement and old age.
Today there is a marked increase in the awareness of the need to prepare financially for retirement compared to a decade back. Yet, people aren’t doing much to address the need. Why is this so? In our experience there are two stark reasons why folks find it challenging to build a solid retirement corpus:
Investments not linked to goals
Most people who invest, even the regular and disciplined ones, tend to invest a random amount left after monthly spends. This investment is not linked to any goal, including retirement. While you may be cognizant of the need to fund your retirement, chances are you’ve not given thought about whether your present level of savings is sufficient. Nor attempted to create a plan on how investments should be strategised to reach the goal in time.
Retirement takes a backseat
In the absence of a plan or strategy, goals are addressed as they come. Hence the responsibilities of providing for a house, children’s education and their marriage take priority through a good part of the working years. By the time the reality of retirement dawns you have only a decade at best to invest.
Here are the important steps to follow for a systematic approach to planning for your retirement.
Work out the amount: Ask yourself at what age you would like to retire. Next think about the lifestyle you desire post retirement. A good number to start with is your current expenses, excluding those that will be absent in retirement; like children’s expenses, EMIs, etc. Make the goal as specific as you can. For instance, “I want to retire on January 1, 2048 and will require a monthly income of Rs 40,000 (in today’s terms)”.
After this comes the critical part of accounting for inflation. In 30 years’ time the monthly expense of Rs 40,000 translates to Rs 3.20 lakh a month, with an inflation rate of 7% p.a. So, by the time you retire at the age 60, you’d need Rs 7 crore to provide for your spouse and yourself till 85 years of age.
Create an investment strategy: Building a corpus of Rs 7 crore by the time of retirement can seem like a monumental task. However, as retirement is 30 years away, with the power of compounding this goal can be easily achieved with modest, regular investments. This goal, along with the rest of the goals of providing for a house, children’s education, etc! Mutual funds are a very good investment option to accumulate wealth towards your retirement goal, alongside the traditional avenues of PPF, EPF and FDs.
Stay the course: Once investments are allocated to the retirement goal, resist the urge to dip into it for another goal. There’ll be plenty of temptations along the way; that unplanned holiday, a car upgrade or the home revamp. Remember that retirement is a goal which cannot be funded by loans; you must diligently provide for it out of your savings while you are earning.
Post retirement, you can start systematic withdrawals from your mutual fund investment accounts. This is among the more convenient and tax efficient ways to provide regular income in retirement. Thus, by planning for retirement early on and creating a strategy, you should be able to create the desired retirement corpus without hassles. The crucial challenge to be tackled is the lack of a planned approach.
By: Amar Pandit
The author is CFA and founder of HappynessFactory.in