When we ask about the life after retirement, some people answer this very casually, they have not even thought about their life after retirement. This type attitude is not good; everybody must agree one fact that, retirement is a reality that will happen today to tomorrow. In any case, you can't escape from this. Everyone grows old. It's inevitable. The question is, will you be ready when retirement gets here? We all know it's coming, but unfortunately, few of us are adequately prepared for its arrival. There are several things we can do to prepare for retiring, even if that important day is far away.
The relevant question here is, how you will live after your retirement ? What will be your main source of Income? Whether the money you saved is enough for the rest of your life? How you are going to fund for any unexpected contingencies? What sort of help you expect from your children?. The only one answer for all the above questions is to plan for retirement well in advance and start savings according to the plan and predefined asset allocation to achieve the retirement/financial goals.
When making your retirement plans you have to consider several things. First, why am I planning? What is your motivation, reason for planning? Also, what plans are out there? There are many paths to the same goal. Finally, of those paths, which one is right for you?
It's never too early to start saving and investing for a comfortable retirement, and those who wait until late in life face additional problems. The good news is that it's never too late to start putting money away for retirement. Even if you are nearing your retirement years, every rupee you put away is one more rupee that can work for you in your retirement years. You can enjoy a great retirement even if you start late, but it's important to control your risk and put away as much as possible in the intervening years.
Why should I plan?
You might be thinking, why should I think about retirement now? I'm young and fit, I can think about it later. This thinking can be a costly and financially dangerous mistake. Everyone should be looking to the future and planning for the day that they will no longer want or be able to work to earn a livelihood. The fact is, average life expectancy in the India is around 75-80 years. Most people will retire well before that age (most of the cases 55-60 years). So you need to plan in advance to find sufficient money to lead a comfortable life for another 20-25 years after retirement.
Furthermore, those individuals who think Government Pension Plans will be enough to take care their after their retirement life, they are fooling themselves. That program was never intended to and never will take the place of good planning, for employer or employee. There will always be a need to supplement this government program. Individuals who plan their retirement are able to supplement this base income with other sources that greatly improve income potential over the course of a retirement. Basically they need an inflation adjusted return. Nobody can predict the financial situation or inflation figures after 20-25 years. So we have to be extra cautious in all our retirement planning process, asset allocation, re-allocation or periodical review of resources according to the changes in the financial market, economic situation, return expectation, increase in the medical expenses, changes in inflation data and changes in the family situation, government taxes etc.
a) The first step in the retirement planning is to decide your retirement age i.e, at what age you wish to retire in other words how many years you have to work until you are ready to retire. The longer you have to save and invest before retiring, the better off you will be.
b) Review your budget carefully to get an idea of how much you are likely to spend in retirement. You need to consider so many aspects while reviewing your budget as discussed in the previous paragraph.
c) Prepare an estimate of your retirement benefits which you are going to receive from your employer as retirement benefits also the expected amount of monthly pension.
d) Estimate how much of a monthly shortfall you are likely to have between the retirement benefits you will receive and what you expect to spend in retirement. Before retiring, you should strive to save enough to meet that shortfall.
e) Use a retirement calculator to determine how much you will need in assets to generate the monthly income you expect to need in retirement. If you search in internet you can find free retirement calculators in various websites
f) Use the number of years until retirement as your guideline when choosing your investment mix. Never invest money in the stock market, Sector specific mutual fund schemes or similar risky financial instruments that you expect to need within the next three to five years. You might be some times forced to sell these investments at a loss, if the market is down at the time need the money. So avoid investment in risky assets for short term.
g) Invest money you expect to need within the next five years in safe investments, such as Mutual Fund schemes investing in bonds and government securities, government bond or other public sector company bonds, bank term deposits etc. Those money require after five years can be invested in direct stock market (selected performing stocks with expert advice), Equity based Mutual Fund Schemes, Company FDs, Commodities like Gold, Silver, Post Office Savings Schemes like, Post Office Monthly Income Schemes, National Savings Certifies, Public Provident Fund (PPF) etc. When you select Mutual Fund Schemes, select schemes having a minimum 3-5 years consistent performance track records and also avoid investing in NFO (New Fund Offers)
h) Keep sufficient money liquid in the savings bank accounts or other liquid schemes for contingency purposes.
i) Invest in good selected Retirement Insurance Plans. Before investing in a retirement plan, please find answer to the following questions; how flexible is the plan? How flexible do you need to plan to be? Looking at issues like early withdrawal of dividend or principal or the possibility of loans for hardship or other life events is essential when weighing the pros and cons of each plan. Retirement Plans offered by life insurance companies are bundled products, offering the benefits of both insurance and investment (I never recommend Insurance products for retirement planning) . A typical retirement plan has two phases.
The first is the accumulation phase, during which you pay premiums and the money accumulates through the tenure of the plan. The accumulated money is then invested in securities approved by the Insurance Regulatory and Development Authority (IRDA), the insurance regulator. These products are designed to protect the value of your principal while at the same time supposed to provide you with steady returns (don't expect huge returns form insurance products). The accumulation stage is followed by the vesting age, which is the age when you start getting payouts from the investment. This can be selected by you. The vesting age in most plans is 40 to 70 years. The period when a person gets pension is also called the annuity phase. During this phase, in most of the plans there is an option to withdraw up to certain percentages of the accumulated amount in one go. The rest is paid as pension. In the immediate annuity option, a person can pay in lump-sum, instead of over the years, and start getting income immediately. The frequency of payments received can be monthly, quarterly, half-yearly or annually. Presently so many retirement plans are available in the market offered by almost all insurance companies. You have to be very careful in selecting the insurance company as well as the insurance plan. While selecting the insurance plans, please keep in mind that, this is a long term investment made out of your hard earned money. You can't afford to lose it.
j) Avoid the temptation to maximize yield at the expense of safety. Nearing retirement, you do not have as much time as a younger person to make up market losses. Avoid reaching for yield in junk bond funds and similar risky investments
k) As you go through the decision making and planning process you need to keep your goals in the forefront and decide what is going to be the best way to get there. There are many retirement planning sites on the Internet with a wealth of knowledge to share. Some of these websites that charge for their services. A bit of savvy searching should lead you to a site to fit your needs and help you meet your goals.
We all want to be comfortable as we get older. No longer can we depend on employers to help us ensure that we will be financially stable as we age. We must take the initiative to make sure that we are taking care of our tomorrow by a bit of careful planning today.
In case you are not experienced enough to plan your retirement properly, it is recommend to take the help of an expert Financial Planner. He will definitely prepare a good retirement plan for you after carefully studying your financial situation and retirement goals.
Best Regards
Prakash Nair
