PV Subramanyan emphasises on the importance of retirement planning and how one needs to start really early on in their lives to plan towards a wealthy retirement.
When it is the time for you to retire, will you be able to afford it? Every person you see working beyond the age of 59 is worried about their retirement. Almost all the research conducted on the subject over the last few years shows that most individuals are unable to demonstrate financial readiness for their retirement years.
The Oasis research says the average balance in the provident fund is only Rs. 24,000. If you do not have an indexed pension, you need to create a sizeable corpus for your retirement.
This only serves to underline the fact that saving for retirement is a dynamic, continuous and challenging process that requires careful planning and follow-through.
Running out of money is a serious worry. Also, we do not want to be leaving waving the last Rs. 100 note as a tip for the undertaker. If it costs Rs. 35 to reach my office will we dare leave our house with exactly Rs. 35 in our purse? We won’t.
One would be carrying Rs. 200 + ATM card + a credit card. Similarly, in case we need Rs. X for retirement; we may need to keep say 2X if not 3X – just in case.
Retiree’s spending pattern changes completely because of fear. One client refuses to take a taxi – (he can afford to BUY a taxi every month!) because he feels it is expensive.
Fear is something which is easy for an outsider like me to see, but the person experiencing it may not even realize this. I know a 81-year-old with a net worth of Rs. 2 crore.
The person’s living expenses is of Rs.2 lakh a year; dividend income of Rs. 5 lakh. That person keeps telling me, “I am worried to withdraw from my capital – what should I do?”
On the one hand I meet teenagers spending like there is no tomorrow and on the other hand here is a 78-year-old worried about withdrawing from his capital!
Here are some helpful tips that should help you on your way to a comfortable retirement.
1. Start soon; I mean TODAY
It is better to start saving at an early age, but it is never too late to start. Even if you are already close to your retirement years - because every rupee saved helps to cover your expenses.
If you save Rs.2000 every month for 40 years at a rate of 12 percent, you will have saved significantly more than an individual who saves at the same rate for 10 years.
Also, keep in mind that asset allocation will become increasingly important as you get closer to retirement. This is because your volatility tolerance generally decreases as the number of years in which you can recuperate any losses goes down.
2. Treat Your Savings as an Expense
It is as real as death and taxes, so, be prepared.
You may have your salary credited to a savings account and have the amount scheduled for automatic debit, to be credited to a retirement savings account on the same day the salary is credited.
3. Save as Much as You Can in a Tax-Deferred Account
Contributing amounts earmarked for your retirement to a tax-deferred retirement account deters you from spending those amounts on impulse, because you are likely to face tax consequences and penalties.
All retirement accounts have some form of penalty on withdrawals – either in the form of a lock-in or in the form of the same being added to your income. Examples of this include PPF, pension plans, equity funds that you earmark for retirement, etc.
Look at this positively – the lure of current consumption is too strong hence such measures are a must. The most important thing is whether it is a insurance plan or ELSS you pay no tax even on withdrawal – so let it grow unhindered by income tax.
4. Diversify Your Portfolio
You cannot put all of your eggs in one basket holds true for all assets. Putting all your savings into one form of investment increases the risk of losing all your investments, and it may limit your Return on Investment. As such, asset allocation is a key part of managing your retirement assets.
Proper asset allocation considers factors such as the following:
• Your age - this is usually reflected in the aggressiveness of your portfolio, which will likely take more risks when you're younger, and less the closer you get to retirement age
• Your volatility tolerance - this helps to ensure that, should any losses occur, they occur at a time when the losses can still be recuperated
• Whether you need to have your assets grow or produce income
5. Consider All Your Potential Expenses in Your Financial Plan
When planning for retirement, most people I meet underestimate – expenses for medical costs, nursing, and other voluntary expenses like employing a cook, maid, hiring a vehicle to get around, travel, gifting, etc.
When deciding how much you need to save for retirement, make a list of all the expenses you may incur during your retirement years. .
Saving a lot of money is great, but the benefits are eroded or even nullified if it means you have to use a credit card to pay your living expenses. Therefore, preparing and working within a budget is essential.
Your retirement savings should be counted among your budgeted recurring expenses in order to ensure that your disposable income is calculated accurately.
7. Periodically Reassess Your Portfolio
As you get closer to retirement and your financial needs, expenses and risk tolerance change, strategic asset allocation must be performed on your portfolio to allow for any necessary adjustments. This will help you ensure that your retirement planning is on target.
8. Reassess Your Expenses and Make Changes Where Possible
If your lifestyle, income and/or fiscal responsibilities have changed, it may be a good idea to reassess your financial profile and make adjustments where possible, so as to change the amounts you add to your retirement nest egg.
For instance, you may have finished paying off your mortgage or the loan for your car, or the number of individuals for which you are financially responsible may have changed.
A reassessment of your income, expenses and financial obligations will help to determine if you need to increase or decrease the amount you save on a regular basis. And keep revisiting your life insurance portfolio.
9. Consider Your Spouse
If you are married, consider whether your spouse is also saving and whether certain expenses can be shared during your retirement years.
If your spouse hasn't been saving, you need to determine whether your retirement savings can cover not only your expenses, but those of your spouse as well.
10. Work with an Experienced Financial Planner
Unless you are experienced in the field of financial planning and portfolio management, engaging the services of an experienced and qualified financial planner will be necessary.
Choosing the one who is right for you will be one of the most important decisions you make.
What we've discussed here are just a few of the factors that may affect the success of your retirement plan and determine whether you enjoy a financially secure retirement.
Your financial planner will help you to determine whether you should consider other factors. As we said before, starting early will definitely make the task ahead easier, but it is not too late to adopt some of these practices, even if you are already retired.