How to Plan your Retirement? Financial Planning and More

Dinesh Maheshwari June 20, 2019

When you’re just young and just starting out in your career or job, saving for your retirement can feel like an event so far away and distant, that it feels pointless to worry about it right now. This is especially true if you’re earning just enough to live paycheck to paycheck.Some of life’s biggest events occur between 20-35, including marriage and starting a family, moving up the career ladder, or relocating to a new city; undoubtedly, these events create an impact on your finances and therefore cause these years to be fraught with some degree of instability, especially when it comes to money.Regardless of what age you are, your retirement is never too far away to consider saving up for. Read on to find out how to plan and save your retirement, even if you’re past your thirties.

Retirement Savings Explained

Before you start saving for your retirement, you should know the difference between definitive savings and voluntary saving. Definitive savings include your provident fund account which is done by almost all the salaried employees, whereas voluntary saving include your other financial investments like property, mutual funds etc. If you plan your voluntary savings properly, it will greatly benefit the quality of your post-retirement finances and life.For most people who have a regular job12% of your basic monthly salary is deducted and contributed by your employer into your Provident Fund account. This is a good way to build a nest egg, and the best thing about automatic deductions towards your PF account is that it’s unavoidable. The Provident Fund mandate requires all employees to contribute 12% of their basic income to retirement savings, which include the Employee Provident Fund and the Family Pension Fund. This is a definitive saving that becomes the default retirement plan for many individualsYou may think that your PF savings might be sufficient for your retirement years, but this is quite far from reality. Considering annual inflation, simply relying on your PF alone is not sufficient for covering everyday living expenses and unexpected emergencies. This is where your voluntary savings comes into playGenerally, most people are unable to significantly increase their definitive saving unless they advance in their job/career; thus, for coping up with the post retirement expenses, they must voluntarily start investing money. Make it a thumb rule to always invest at least an additional 10-15% of your monthly income into a SIP with good returns, and increase your investment rate with your subsequent income increments. This will help you realise your financial goals faster.

How to Calculate Your Retirement Savings Requirement

Inflation reduces purchasing power of your money. It is rate at which price of basic commodities increases. Assuming an inflation of 6%, Rs 1,00,000 today will be worth only Rs 17,500 after 30 years. Ignoring inflation means you will save much less than what you will actually need in future. If you spend Rs 50,000 every month at the age of 30 years, then you’ll need Rs 2.87 lakh per month by age 60 (assuming that prices rise at the rate of 6% every year).You have to invest in such a way that you beat inflation; ie, receive returns that are at least a couple of percentage points above the inflation rate. If not carefully planned, your savings may not be enough to let you maintain your present lifestyle by the time you reach your senior yearsThe amount needed for retirement depends from person to person. Take into account what age you expect to live till, what age you want to retire, and what quality of life you want to liveOftentimes, people realise the need for retirement planning during the last few years of their working life. The second problem is that the amount of savings required is underestimated. For example, if you are married and your spouse isn’t a contributor to the household income, you may need to save up additionally to plan for their expenses, in additional to any unexpected emergencies that can occurUse this basic formula to calculate your retirement savings requirement: FV = PV (1+i)^FV = Future value PV = Present valui = Rate of Inflation n = Number of yearThe age at which you start saving also makes a drastic difference in your retirement corpus. Let’s look at an example of two people who start saving for their retirement at ages 30 and 40 respectivelygraph1Mr. A, who is currently 30 years of age, earns Rs. 50000 per month and spends Rs 30000 monthly. He plans to retire at 60 and expects to live till 75. In our calculations, we are assuming the yearly inflation to be at 6% and expect a moderate return of 13% on investments made. To maintain his present lifestyle, for 15 years after retirement, Mr. A would need Rs. 4.81 crores as retirement corpus. Huge amount, isn’t itAt retirement, Mr. A will receive Rs.1.39 crores from PF saving to support his old age but to maintain his present lifestyle, he will need an additional Rs. 3.41 crores. Thanks to Mr. A’s monthly investments in the markets of Rs. 5300 in SIPs, it will yield him Rs. 3.42 crores at the age of 60 yearsconcludThe above chart exemplifies the cost of being late in the investment game. If you start late, your monthly contribution will increase exponentially, i.e. for starting at 35 your expected monthly contribution will be Rs.10400 and for starting at 40 it will be Rs. 21,200. If due to whatever reason you are unable to investest the desired monthly amount, you’ll end up with significantly less retirement funds to support your retirement lifestyle.

The obvious fact is that the earlier you save- no matter how little you start off with- the less you have to worry about your finances in your later years. Even if you’re over 40 and it may be more challenging to start saving enough for your retirement years, it’s never too late to start now.Remember that it’s also unwise to rely solely on your Provident Fund savings to cover your retirement costs. When you consider unexpected events and needing to cover your spouse’s expenses, you’ll want to have a substantial supplementary income to grow your retirement corpus by investing in SIPsPutting in a little extra time to plan out and making some sacrifices for a few years to ensure you have a more stable future is well worth the effort; because remember, your retirement years is a time to reflect on life and give full focus to the things you’re passionate about. By investing earlier on, one can take advantage of the power of compounding interest to maximize their investment return.

Dinesh Maheshwari

June 20, 2019

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