Jean Chatsky (financial journalist) once proclaimed "Your retirement comes before your children's tuition." That's because there's no financial aid for retirement, while there's still a good deal available for college. For a sizable percentage of us who depend on monthly paychecks to keep the clock ticking, the word 'retirement' can spell 'anxiety'. However, if you're a diligent saver, it could be something to look forward to. But the question always looms large. Just how much is enough?
Points to ponder before you make your retirement plan
- The average life expectancy by 2040-50 will be 75 years, with a few of us even living into our late 80s. So cheers to that.
- An honest and objective assessment of your living expenses is critical to saving enough. Factor in some indulgences too.
- Covers for unexpected medical expenses must be separate from savings for daily living.
- Inflation and tax obligations never retire.
- Corpus built for retirement is to be touched only after you stop earning.
Having read the ground rules, let's explore two key tenets of the retirement planning challenge.
Maximize Your Savings
Forecasting how much you will need in retirement is complex, says Nobel prize winning economist William Sharpe, because there are just too many variables —how long you or your partner will live, rate of inflation, performance of the equity market, risk-free return rates, how much you would actually consume when very old, etc. Experts say that you will need 75 – 85% of your last salary to maintain the same standard of living. This is the case if you're in the best of your health and don't plan to take that yearly vacation abroad. However, as general rule of thumb, aim to save at least 15% of your income annually starting as early as yesterday. You could also use online calculators to arrive at your saving target or consult financial planners to do the same for you.
When saving for retirement, the earlier you start the better. In fact, savings made in the first few years are very important as they compound the most. Also, we start earning in our 20s, and take on financial responsibilities like family, children's education and caring for elders only in our 30s or 40s. So, the potential to save early on is the greatest.
Starting to save in your 20s also allows you to opt for a more aggressive investment strategy, increasing your chances of making sure that your rate of return beats inflation by a good margin. Let's look at an example.
The 10 additional years that you give your money to grow can make a significant difference. The later the start, the more you will need to save–so, instead of Rs. 5000 per month, you would need to save Rs. 22,000 monthly at 15% returns to reach Rs. 15 crores by retirement.
Maximize Your Returns
Understanding the tools to protect your money and make it grow is the key to meeting retirement goals. We recommend maintaining a healthy mix of the following assets via regular monthly investments for your retirement savings:
- Provident Fund Schemes are good ways to start building your corpus. Start early on with one of these (EPF, PPF) preferably EPF. For those who don't have this option, invest 12% of your income in MFs depending on your risk profile.
- Pension Schemes/Annuities such as National Pension Scheme (NPS) and Atal Pension Yojana are specifically aimed at the unorganized service sector, an initiative by the government to create a pensioned society in India.
- Mutual Funds Retirement Plans or regular equity based MF schemes if you are a prudent investor. A thumb rule to decide the equity allocation in your MF investments is '100 minus age'. While in your 20s therefore, an 80% equity and 20% debt allocation yields good returns. And when you reach 50, your investment portfolio should have 60% of equity and 40% of debt. With advancing age, increase debt and decrease equity allocations to avoid losses due to short term volatility. Review and adjust your investments as you move up the age bracket to ensure the protection of your savings.
- Health Plans come as the silent hand from heaven when you need it most. In some cases, it even pays you for a whole year, when you're on that health sabbatical and unable to get back to working. It's a must have.
- Term Life Insurance plans with smaller premiums are necessary if you're the sole bread winner of the family. Some of these plans also cover loan obligations in case of death or disablement of the primary earner.
- Senior Citizens Saving Schemes are a good way to continue saving when you are already retired and are able to save a portion of your pension. Senior citizens earn higher rates of interest on bank and government issued instruments, which are also safer than market based investments.
While the new kids on the job can be cautioned with the saying "You can be young without money, but you can't be old without it", for those of us who are half way through, phased retirement, focus on health and re-balanced investment portfolios are the credos to live by!