Goal Based Investing

Retirement Planning

Until a few years ago, people used to look forward to retirement as a relief from the monotony of working life and the restrictions that it placed on them. They would be planning to enjoy the retired life by spending time with the members of the family, particularly with grand children. Not many people used to worry as to how they would be managing their needs during retired life, as taking care of the elders was considered as the duty of the younger members of the family. During retirement, people desire to pursue activities that were closer to their heart, but could not be pursued because of the pressures of corporate life.

Economic prosperity has given more disposable income in the hands of Indians while better healthcare has improved their life expectancy significantly. Today, an average Indian lives well beyond the retirement age of 60 years. While this should be good news for all, people unprepared for retirement will find themselves in a fix. More and more people are starting to realize the importance of retirement planning and the need to be self-dependent even in their old age.

Need and Importance

There is a difference between retiring and retirement planning. It is not about quitting your job or business today; it is about giving you better options for tomorrow. You may be mentally prepared to work even after age 60; however, physically your health may not support your wish. Retirement planning can throw light about how soon you can attain financial freedom and do what you like without worrying about the financial outcome.

The conversion into retirement is a very unique and dramatic step in life. Yet, the transition into retirement is rarely given the planning or thought it deserves. Everyone wants to lead a comfortable retirement. Without adequate planning, it probably will not happen. People are living longer than ever before, which is obviously good news, but that also means retirement is becoming more expensive. Therefore, it is important to plan ahead and be financially prepared once you reach retirement age. Retirement planning means setting aside of money or assets for the purpose of deriving some income during old age. This is to be done before reaching retirement age.

Remember, your aim is to make decisions that will be most effective in helping you realize your future financial goals, based on your current personal financial situation

What you should do?

Retirement Planning, at its best, is an educated guess about the future. As highlighted in the quote “It’s Better to be Approximately Right than Precisely Wrong”, we should try to make a wild guess based on the following steps.

Determine your Retirement Age

The earlier you want to retire, the more money you will need. If you are in 20’s, then your working period may be higher than your retirement period. Your retirement saving period decreases day by day. Planning at the early years of your career helps to compound the corpus many times by the time you retire.

Estimate your Life expectancy

As per latest Indian statistical data, the average life expectancy is Age 67 for Men and Age 69 for Women. It is steadily increasing over the last three decades, due to better diet and immunisation. Hence, you can safely add 10 to 15 years over the average life expectancy to arrive at your life expectancy.

Calculate your Pension requirement

Decide how much income you require to live comfortably in your post-retirement years. Consider aspects like increased medical costs, vacations but reduce costs like children's education and rent, if you own your home. You must map this income on basis of your current lifestyle. Experts recommend 80 per cent of your inflated current expenditure as an approximate figure to meet the post-retirement expenses.

Take Inflation into consideration

While estimating your pension requirement, consider inflation during the pre retirement and post retirement. If you expect a modest life style during the retirement, then you may consider a lower post retirement inflation. Expected inflation could range from 5% to 7%.

Allocated Savings for retirement

Apart from allocating savings for other goals (like Child education/Marriage & to buy a house/car), you need to allocate regular monthly sum for retirement planning. You need to save systematically in various investment instruments.

Choosing a ideal plan

In this article, we have focused only on retirement planning. We have not taken into account the other financial goals such as child education needs, life style needs, contingency needs etc. You should invest across various asset classes for each goal. We have recommended a certain asset allocation for each age group only to accumulate the retirement corpus. We recommend a diversified portfolio across mutual funds, stocks, National Pension System (NPS) and Public Provident Fund (PPF), for accumulating the retirement corpus. Since you are investing for the long term, look at products that also have a tax advantage for saving for long duration.

Recommended Model Portfolio for the Aggressive Investor

Investments For 20’s For 30’s For 40’s For 50’s
Equity MF 55% 35% 20% 20%
Equity Shares 15% 10% 10% 0%
Debt MF 10% 20% 25% 25%
PPF 10% 20% 20% 25%
National Pension System (NPS) 10% 15% 25% 30%

Recommended Model Portfolio for the Conservative Investor

Investments For 20’s For 30’s For 40’s For 50’s
Equity MF 35% 20% 20% 10%
Equity Bluechip Shares 10% 10% 0% 0%
Debt MF 20% 25% 25% 25%
PPF 20% 20% 25% 30%
National Pension System (NPS) 15% 25% 30% 35%