Home / Opinion / The A.R.T. of retirement planning

Building wealth for a secure and an early retirement is actually a simple two-step process. The first step is personal planning, which will determine your satisfaction with your retirement lifestyle. The second step is financial planning, which involves identifying sources of income and expenses and establishing a retirement budget, based on your personal plan.

The mantra for a successful retirement plan is an A.R.T.

• Amount you invest

• Rate at which you invest

• Time period for which you invest

The challenge isn’t in having this knowledge, but in translating it into meaningful results. Let’s take a look at these three aspects.

Amount you invest

Most of us are prudent in our financial lives—we save for the rainy day, spend within our means, pay off credit card dues and loan instalments on time and invest for future needs.

To be on top of finances, a good way to start is to prepare a budget. This will be a record of money coming in from sources such as salary, rental income, interest income and others, and payments to make, such as rent, mortgage and insurance premium.

One could simply write down all these details on a sheet of paper, or use an Excel spreadsheet. There are also various online budgeting tools available. Such tools available with banks pick information directly from your transactions. Whichever method you choose, the aim would be to record all inflows and outflows.

While making a budget will help you save, the next step is to invest those savings. The rule is to save money and build assets. The sooner you begin and the more you save, the earlier you will be able to retire with enough wealth.

To successfully grow savings, have a road map—a financial plan with clearly defined goals. Without a plan, saving and investing may become directionless. Goals could be marriage, children’s education, buying a house or creating emergency funds. To achieve these, individual risk appetite, time required and rate at which savings will grow, play an important role.

Rate at which you invest

The second principle in wealth accumulation is the rate at which savings grow. Most salaried individuals will have three sources of income after retirement:

New Pension System (NPS): This retirement product has delivered annualized returns of around 10% in the past four years. NPS also provides tax benefit in the form of deduction under section 80C (of the Income-tax Act, 1961). Being a retirement product, it is mandatory to purchase annuity worth 40% of the corpus accumulated through NPS at the time of retirement. One can choose between active or passive styles of investment, and there are equity, debt and liquid funds to choose from.

Employees’ Provident Fund (EPF): This is another popular retirement saving instrument in India. Though it was introduced as a retirement product, not many see it so. The current rate of return from EPF is fixed at 8.75% per annum. It offers deduction up to 1.5 lakh limit under section 80C; interest is tax-free and so is withdrawal if there is continuous service of five years.

While these two products are meant for retirement planning, they may not be enough to meet all of one’s post-retirement needs. Hence, it is prudent to look at other products as well.

Personal investments: These would include fixed deposits (FDs), recurring deposits (RDs), mutual funds (MFs), and other products.

Whenever one talks of long-term savings instruments, FDs are the most popular. These are considered as one of the safest instruments for the risk-averse investor group, but post-tax and inflation adjusted returns are low. Some other options allow higher flexibility, while investing in a phased manner—RDs and systematic investment plans (SIPs) by fund houses.

RDs require an investor to put a fixed sum every month for a minimum of six months and thereafter in addition of three months, up to a maximum of 10 years. Unlike an FD, a lump sum amount is not needed. RDs, being bank deposits, have low risk and returns are fixed though they vary with tenure of deposit.

Through SIPs, too, one can invest at regular intervals. This is considered to be the safest way to invest in equity and debt markets as the investor is not trying to capture the highs and lows of the market, but average the cost by investing at regular intervals. In an SIP, when the market falls, the investor gets more units, and lesser units when the market goes up. This means that the investor buys less when the price is high and more when the price is low. This way, the average cost per unit falls over a period of time.

Time period for which you invest

The third principle in saving and investing for retirement is the amount of time you give for the savings to grow. The golden principle is that the longer you stay invested, more is the probability of generating a positive return. If you start investing six years later, and the assets grow at 12% annually, you will have half as much money when you retire, compared to starting today (assuming equal contributions over one’s working lifetime). If you wait 12 years, you will have only a quarter as much when you retire.

The power of compounding is an invaluable wealth-building tool because money grows geometrically instead of arithmetically—but only when you give it time to work.

To summarize, it is imperative to start early and invest regularly, understand the effect of each financial decision, re-evaluate the financial situation periodically and be realistic in expectations.

There are various retirement products available and one should start allocating funds towards them at the earliest. Ideal time to start would be 1-2 years after the first job. If you have not started yet, now is a good time to do so.

Pralay Mondal, senior group president-retail and business banking, Yes Bank.

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