Top tips to build your retirement nest Jan 30, 2014 16:38 | Source: Moneycontrol Achin Goel Bonanza Portfolio Ever tried to think what goes on in a persons mind when he thinks of retirement? One would like to live comfortably, carry out their long due hobbies, spend time at leisure without worrying much about finances. However, in reality this seldom happens! Many people enter their retirement worrying about day–to-day expenses and making their ends meet. Imagine, working at an age of 70 years to still be able to fend for your family. Surely, this thought sends shivers down our spine! The bottom line thus is that everyone wants to have best time of life during retirement years, however, it is surprising to note how most of us fail to plan for it. There are some reasons that can be attributed to inefficient retirement planning, especially for the Indian population. Most often, ageing parents look upon their children to support them through their old age. Though, this is part of the Indian culture and family values, it may not be practical in todays economic scenario. Such dependence often leads to inferior standards of living, continuous feeling of being dependent and finally may lead to other societal vices like abandonment of parents in old age etc. Other reason could be lack of sufficient knowledge and seriousness around the subject. Young working professionals need to understand that they have approximately 35 years (assuming work-life span from 25 to 60 years) to plan and accumulate for a retirement period of approximately 20 years (assuming retirement at 60 years and a normal life span of 80 years). So, one must not only work to make ends meet today but should also simultaneously plan for a comfortable retirement life. Having established the need for a retirement plan, lets delve into techniques of efficient retirement planning. As its said, “What gets measured; gets monitored! Thus, it is absolutely important to estimate your retirement corpus. A good estimate can be arrived by defining your retirement lifestyle. A simple illustration would help understand the important connection between well-defined retirement lifestyle and estimation of retirement corpus. Illustration: Mr. Sharma (40 years) plans to retire at an age of 60 years and expects an inflation adjusted income of Rs. 3 Lac per annum (in current money terms) post-retirement. Further, Mr. Sharma does not want to work after retirement and would like to enjoy stress free retirement period. With assumed life expectancy of 80 years and inflation @ 7%, Mr. Sharma would need approx. Rs. 2.12 Cr by the time he retires after 20 years. Assuming this corpus would be invested by Mr. Sharma, in some safe asset class like bank FD, debt fund etc, yielding interest income of 8% per annum, he would be able to spend his retirement period as envisioned by him. It becomes clear from above illustration that process of retirement planning, which started from defining retirement lifestyle culminates into quantification of the goal i.e. funds required. As we delve deeper into above illustration (after estimation of retirement corpus), we find ourselves surrounded with many interesting and pertinent questions such as: how much Mr. Sharma needs to save/ invest every month to reach the target retirement corpus of Rs. 2.12 Cr in 20 years? In which asset class should such investments be made: equities/debt/PPF etc? Is it actually possible for Mr. Sharma to invest regularly to accumulate the required retirement corpus? If Mr. Sharma cannot invest the estimated amount every month, then how much shortfall will be there in retirement corpus? Can anything be changed at this point of time (with 20 years in-hand) so that this shortfall can be met? The list of questions can be longer and these questions are essential to be answered. The advice is to not get worried, but approach it in a planned manner. In addition, a professional advice by a financial planner is highly recommended. Some avenues for building your retirement nest are discussed below: a. Start Early: Old adage – the earlier the better – applies very strongly when it comes to retirement planning. For example: Mr. X who starts saving Rs. 1 Lac every year (investments giving avg. returns of 9% per annum) at the age of 40, will have a corpus of approx. Rs. 55.76 Lac. On the contrary, if Mr. X had started saving at the age of 30, he would end up with a corpus of 1.48 Cr by the retirement age of 60 years. Thus, there is a humongous difference of around Rs. 93 Lac in the retirement corpus just by starting 10 years earlier. b. Diversify investments: Many people presume that they will have sufficient rental income upon which they can comfortably live their retirement life. Depending on one asset class is very risky and gives rise to concentration risk. If for some reason you are unable to rent out that property, may be due to dispute or some change in regulations, then your golden retirement period will turn into a nightmare. Hence its always recommended that you should diversify your investments and reduce your risks. Diversification across various asset classes is generally determined on the basis of persons risk proclivity and time-in-hand for that goal to mature. c. Annuities: Annuities is inflow of regular stream of income at specified intervals, predefined in the plan. It is advised that while planning for retirement, some component of retirement income should be from annuities. Having annuities contributing to your retirement income, you will know your cash flows in advance with certainty. Knowing cash-flow in advance can come very handy when it comes to living retirement life. d. Work part-time: Generally, most of us do not start planning for retirement until its too late. Major disadvantage of starting late is that you would not be able to make sufficient investments required to build your retirement corpus hence ending up with shortfall. If its known in advance, then it will be good idea to start thinking along the lines and develop some skills required to work part time. e. Rental Income: Rental income from commercial and residential properties is another prominent source of supplemental retirement income. However, as discussed above, one should refrain from depending entirely on one income source for living retirement life. Rental income should be always used in combination with income from other sources/ asset classes. f. Supplemental Income: Supplemental income encompasses the component of income which is due from dividends from stocks, interest from FDs, coupon from bonds etc. At the end, its easier said than done! In order to plan efficiently for a retirement, it is advised to seek help from a professional. A certified financial planner can help you estimate the corpus and suggest means to accumulate it over a period of time. The general Indian mindset looks at professional advisory as an additional expense. However, in modern times, where unexpected inflationary increases and nuclear families is the new norm, a good retirement plan can make a huge difference. The author is a Head-Wealth Management & Financial Planning at Bonanza Portfolio.
Posted on: Thu, 30 Jan 2014 15:49:12 +0000
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