We will all grow old and need to plan our lives after we stop earning. Only 3% of the population is covered under pension schemes, and others need to sustain themselves through savings during their earning years.
Retirement planning has two stages, i.e., the Accumulation Stage where we save for retirement and the Management Stage where we need to prudently manage our corpus so that it does not deplete and covers the risk of living too long. In this blog, we shall cover only the accumulation stage. The management stage will be covered in the subsequent blog. Retirement planning is like a game of snakes and ladders where one needs to balance between current needs and future responsibilities. One wrong decision, and the snake would bite, requiring you to restart.
Tips for Retirement Planning Accumulation Stage
Calculate your monthly expenses post-retirement: By this time, most of your responsibilities will be over, but medical expenses may be higher. Assume inflation of 6%, calculate your monthly expenses to determine the corpus value. For example, if you need Rs 50000 per month, then multiply it by 200, which will give you the value of the corpus, i.e., Rs 100 lakh.
- Plan early: If you want Rs 100 lakh, then understand the meaning of the time value of money. At age 30, you need to save only Rs 7000 per month at an 8% growth rate. But at age 40, this amount increases to Rs 18000 per month, and at age 50, it goes up to Rs 55000 per month.
- Goal-based saving: Have financial goals like child education, marriage, house, and retirement, and allocate money for each goal. Ideally, you should save 30% of your income towards future goals. If your take-home is Rs 1 lakh, then allocate only Rs 70000 towards current needs and allocate Rs 30000 towards financial responsibilities.
- Choose the right instrument: Have a balanced approach with respect to return, tax efficiency, and liquidity. If you have time more than 5 years, then go for equity exposure, which would offer the best return. Take help from a financial advisor in selecting a portfolio; a few tips are given below:
- NPS: National Pension Scheme has an edge due to tax efficiency. It increases your section 80 C limit by Rs 50000 under section 80CCD (1B). You save an additional Rs 15000 in taxes if you are in a 30% tax bracket. NPS has also given inflation-beating returns. All taxpayers should opt for NPS as the primary instrument.
- Mutual Funds: Go aggressive on SIP. Build a portfolio for retirement and do not touch it until retirement. Post-retirement, opt for systematic withdrawal for tax efficiency.
- ELSS Mutual Fund: This is the most attractive tax-saving instrument under the section 80 C limit of Rs 150000. It has a lock-in of three years, and returns have been beating inflation.
- Pension Plan of Insurance Companies: Suitable only for those who are not disciplined and averse to equity exposure. It mandates yearly compulsive saving. Returns are not beating inflation.
- PPF: Debt-based tax-efficient plan. Must be an integral part of the portfolio for balancing with equity and debt.
Snakes that can bite your purpose of saving for retirement:
- Emotional blackmail: Giving money to friends/relatives/children for their financial goals.
- Debt-based portfolio: Without exposure to equity, one can never beat inflation.
- Greed: Do not fall into the trap of offers with the promise of doubling your money in three years or offering monthly income through Agent code, etc. Such offers are unrealistic and too good to be true. Evaluate such offers and say No.
- Unproductive/depreciating assets: Do not overspend on depreciating assets like luxury cars/Mobile Phones/Television, etc., by liquidating your retirement corpus.
- Property: Do not overspend on building a property by taking an extra loan that impacts your saving capacity.
Insurance Samadhan keeps receiving complaints from victims of frauds in the age bracket of 50-60 who thought of retirement planning at a late stage of life and chose risky instruments to build a retirement corpus. Most of them were given offers of Insurance Agent code generating regular income from age 60. Under this offer, they were asked to buy 10 or 20 insurance policies involving Rs 10 lakh. Such offers are accepted due to greed and the need for regular income. Insurance Samadhan handles such cases and tries to recover their lost amount. They would not fall into this trap if they have disciplined savings from early days.
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