By Ashima Agarwal
The first step to build a retirement corpus is to estimate the monthly or annual income of the household as this will help to plan for financial independence. Once that is done, the next step is to plan for monthly income which will include family expenses, education expenses if any, lump sum to take care of yearly expenses like health insurance premium, car insurance premium or any other unforeseen circumstances.
To have an in-depth understanding, let’s talk about Ramesh, an IT professional working for the past 15 years and who will be retiring after 15 years. He lives in Delhi with his mother, wife and a 12-year-old son. What all should Ramesh plan for before retirement as he is the only earning member in his family?
Let’s say, the monthly income of Ramesh is Rs 30,000 (Rs 3.6 lakh a year) and he has an annual expenditure of around Rs 2 lakh. As his son grows up, Ramesh expects his annual expenses, including his son’s education expenses, will be Rs 5 lakh per annum. To fund the additional expenses, he can take an education loan, or spend from his savings or have a mix of both.
Regular cash flow
He can put aside Rs 25 lakh in bank deposits and keep withdrawing Rs 5 lakh per annum. In this case he will be left with no or negligible money at the end of six to seven years. In this case, he will exhaust all his savings.
Another option is to plan carefully well in advance and look for suitable investment schemes. To ensure adequate monthly income, Ramesh can opt for diversified investments such as post office schemes, recurring deposits, Monthly Income Schemes, National Pension System and mutual funds which will help him to meet his monthly expenses.
Investment in high dividend yielding stocks can fetch regular dividend income —last year the dividend yield of some of the government listed securities like Coal India, REC, PFC and ONGC was more than 7%. Also, the corpus invested will increase over time ensuring financial strength for Ramesh and his family.
One should always be prepared for the worst. Having an emergency fund is very important as it is a saviour during emergencies which cannot be covered by either insurance or the investments made earlier. If an individual is serious about having a worry-free retired life, planning for finances and investing during the earning years is extremely critical. That way, when you do not work anymore, your investment will definitely work for you.
The writer is associate professor, Amity Business School, Amity University
BUILDING A NEST EGG
- Opt for diversified investments such as post office schemes, recurring deposits, National Pension System and mutual funds
- Build a contingency fund to pay for any medical emergencies