One of the most overlooked aspects of financial planning is retirement planning. Throughout our earning years we have so much to think about that we sometimes forget about planning for the days when we would not have an active income stream. Retirement is a time of relaxation and peace, but you will still have many expenses to take care of, and if you plan to enjoy your retirement life to the fullest you may require surplus funds to plan vacations and other activities.
What is retirement planning?
Retirement planning is nothing but the act of setting up income goals for the post-retirement period.
Most experts agree that you will need at least 70-90 percent of your current monthly salary when you retire. For example, if you earn Rs. 1 lakh a month today, after retirement your income must be between Rs. 70,000 to Rs. 90,000. This cannot be achieved only via savings. You must invest in high return instruments to get an income stream without working.
Reasons for Planning for Retirement
Why do you need a retirement fund? The answer is simple. You stop working and hence your income from your work would also stop. But you will still have daily expenses, medical expenses and other emergency expenses to take care of. All that requires funds and a retirement plan will help you create those funds. Here are the two major reasons for retirement planning.
The most important reason to create a retirement corpus is for medical emergencies. Old age brings with it various health concerns and with rising cost of treatment, medical expenses can burn a huge hole in your pocket after retirement. To counter this, you must create a retirement plan to take care of such emergencies.
Even an inflation rate of 5% every year will reduce the value of Rs. 21 lakh to just Rs. 7.5 lakh in 20 years. And in India the inflation rate is even more. So whatever you can buy right now with your current salary will be even costlier after retirement. You may not live a lavish lifestyle but you would still spend on daily expenses, medicines, utilities etc and the prices for these would be inflated. Planning for it today can help you beat inflation if you create a good retirement plan.
Therefore, it is imperative to start a retirement fund as soon as possible. Here’s what you need to do:
-Evaluate your post-retirement requirement: Before you plan, you must know how much funds you’ll need after retiring. A good rule of thumb is to assume a requirement of 70%-90% of your current salary. You must also take into account inflation.
– Start investing today: If you invest Rs. 10,000 into a retirement fund at age 35, by the time you retire, you would have a corpus of around Rs. 1.3 crore assuming a return of 10%. Your corpus could grow even bigger if the returns are higher than 10%.
– Choose your investment avenues: Once you know how much you need, then you can choose where you want to invest. This can vary based on your risk appetite and other factors.
– Keep reviewing your plan: Setting up a retirement plan and forgetting about it is not a good idea. You must keep re-evaluating it at regular intervals to keep up with your evolving financial needs.