Retirement planning is often perceived as a complex and distant exercise. Paralyzed by the effort involved, many choose to give it a complete pass. Short-term needs often trump long-term considerations. This is a big mistake. Some planning is better than none and a few rules of thumb can go a long way in effective planning. The issues in retirement planning are accounting for the time value of money, dealing with the bewildering number of investment options and overcoming inertia.
Also, most forms of retirement planning are clinical and focused around financial estimates rather than personal aspirations and expectations.
Some simple and practical steps to start planning:
Decide retirement age and plan backwards: You will need 60-70% of your pre-retirement income to support your current lifestyle after retirement.
Enter forced monthly savings: The surest path to a secure retirement is regular saving. There is substantial evidence to demonstrate that left to our own devices, most of us would spend all the money we earn each month. Purchasing a financial product that forces savings is the most effective way to build a corpus. Such products include systematic investment plans introduced by mutual funds, regular premium life insurance policies and recurring deposits offered by banks. Keep in mind that the earlier you start saving or investing, the more time there is for the power of compounding to take effect. As you progress in your career and earn more money, try to step up your savings effort.
Set absolute savings target each month: This would vary between individuals. However, 20% of your monthly salary is good to start. This is in line with the country’s average savings. In general, the more one earns, the higher the savings. So, people in the highest tax bracket should save at least 40% of their monthly. Annual bonuses should also be saved and invested.
Live within your means: Do not take unnecessary debt that you will find hard to sustain. A quick way to estimate whether the debt is reasonable is to ask yourself that if you were not working for a year, would you be able to pay the EMIs on a sustained basis.
Decide your asset allocation carefully: Keep your investment goals, time horizon and risk tolerance in mind when you allocate your resources in various savings instruments. If you are looking at the long term, avoid keeping a large proportion of your money in savings, current accounts or non-income generating instruments. This money needs to be invested more efficiently.
Reduce exposure to equity with age: It is difficult to predict market volatility so my advice would be to conserve your savings when you are nearing retirement. A rough rule is to maintain 15% or less of equity if you are over the age of 50, 30-40% when in the 40s and over 50% in your 30s.
Avoid investments that promise impractical returns: Today, offering double-digit guaranteed returns is impossible. Beware of such schemes. Even an indicative double-digit rate should be scrutinized and the risks understood. I see too many people lose their hard earned money through such investments.
Avoid churn of financial instruments: There is a cost involved each time you sell a financial product. Often, this cost does not support the anticipated extra returns. When you make an investment, have an outlook of five to 10 years.
Seek professional advice: Identify and work with an advisor who you can trust to make the right investment decisions on your behalf. The person should be capable of assessing your specific retirement needs and suggesting personalized and effective solutions.
Make health a priority: There is no better way to plan for your retirement than to take care of your health when you are young. Keep fit, eat healthy and buy health insurance early. There are several health insurance schemes available today. Purchase plans that have guaranteed premium rates even as you grow older.
The lifestyle you want to maintain after retirement: It is very important to develop varied interests, keep contributing or working in areas that interest you as long as possible. This keeps the mind active and allows you to fully enjoy your retirement years.
These are a few practical tips to get started on retirement planning. Discipline today will help deliver financial security when you retire and make a material difference to your retirement lifestyle.
Kapil Mehta is managing director and CEO, DLF Pramerica Life Insurance Co. Ltd. Your comments, questions and reactions to this column are welcome at firstname.lastname@example.org