Retirement is one of the most crucial phases of life. It brings a sense of relief to those who have worked tirelessly throughout their youth and now want to have a comforting life. To relish a peaceful retirement, one should start financial planning at an early stage while working as it will take several years to build the desired corpus.
Once you attain 60 years of age, you no longer will be earning. So, you should definitely have a financial backup before attaining this important stage of life to manage your expenses. The early you start, the more benefits you will reap post retirement.
How much corpus should you have when you retire?
These days, with the advancement in healthcare services, life expectancy is touching 100 years in India. Therefore, when it comes to retirement planning, build your corpus according to the life expectancy. You should create your financial corpus in a manner that your savings should stay longer than you and not the other way round.
Consider inflation and falling interest rate
The next step to ponder is factors to consider for building a retirement corpus. You should be conservative while deciding monthly expenses for retirement and also keep inflation in mind. Take healthcare expenses into account as well as they will increase as you age. Considering the rate of inflation at 4%, your monthly expenses may double in 20 years, more than triple in 30 years and multiply by 5 times after 40 years. For instance, if you plan a retirement corpus of Rs 1 crore keeping in mind the monthly expenses of Rs 50,000, by the time you attain retirement age, you might need a corpus of Rs 3 crore as expenses rose.
Moreover, interest rates have fallen considerably. Interest rate on 3 years’ fixed deposit at SBI was 9.25% pa in 2011, whereas, now it is at just 4.5%. So, while expenses would have doubled in 9 years, income would have halved. If you plan your retirement wisely, you will easily get through such shocks to an extent.
So, if your monthly expenses at the age of 30 years is Rs 30,000, if you invest Rs 6231 per month till the age of 60, considering inflation rate and interest rate of 4% and 11%, respectively, you will have Rs 18.69 lakh from which you can withdraw Rs 30,000 per month.
The wealth accumulated for retirement is determined by a simple equation. Amount=P(I+r)n
P is the principal amount, r is the rate of return on investment and n is the duration of investment. The duration of investment (n) has an exponential impact on the corpus accumulated. Longer the duration, higher will be the accumulated wealth. So, a wise option is to start investing early in order to benefit from the power of compounding.
If you start late, you will have to invest a higher amount to create the desired corpus till your retirement. For instance, if you invest Rs 10,000 per month for 30 years in an SIP, you can create a corpus of Rs 2,06,28,433 at a CAGR of 10%. Whereas if you delay this investment by 5 years, your monthly investment amount can go up by 70% to build the same corpus. Further, if you delay by 10 years, you will have to invest triple the amount from what you would invest earlier to create the same corpus.
Have a house of your own
You should work towards owning a house. For a person who is retired, there is no sense of security other than owning their own dream house. Moreover, it provides a lot of benefits including rental income and long term capital gains. Moreover, a prudent decision will be to buy your house through home loan rather than waiting to accumulate wealth. Home loan gives substantial tax benefits on interest paid and principal repaid. Also, try to clear this loan before retirement so that you can live worry-free.
Insure yourself and family
The cost of private healthcare is skyrocketing by 13-14% each year. For a middle class family, bearing these costs during a medical emergency is next to impossible. Therefore, you should invest in health insurance. It provides financial protection against health emergencies as it covers pre and post hospitalization, cost of treatment, ambulance charges etc. You can explore several plans available in the market both for individuals or family floaters.
Buying a life insurance cover is also a must especially if you are the sole bread-winner of the family. Those who want to leave a legacy behind for their children after their absence, should also buy a life insurance plan. Moreover, you can enjoy tax-saving benefits under Section 80C for life insurance and Section 80D for health insurance under The Income Tax Act.
Before choosing a retirement plan, one should know their requirements and needs. A diversified multi asset portfolio is the key for growth and safety for your retirement needs. Your portfolio should be a mix of PSU sponsored instruments, fixed income instruments and right exposure to mutual funds, so that you can reap maximum benefits for a secure retirement.
(By Rajiv Bajaj, Chairman & MD, Bajaj Capital Ltd)