Expert advice

Aug 28, 2014,13.06 IST

Plan in advance for that early retirement

Anil Rego
Right Horizons

It’s a dream of every working individual to say an early ‘Good Bye’ to the work life. It’s not impossible to fulfill this dream if one starts investing at the earliest possible time as forming a corpus for retirement would be the most crucial task. The corpus formed should be sustainable throughout the life of the last survivor. Investing early will be helpful since one can harness the power of compounding. Although when one starts investing early, the concept of retirement is vague and not clear - but it is important to start saving for this, as otherwise there is likely to be a rude shock awaiting at the time of retirement - in the form of lack of sufficient savings.

It is very important to define and write down the objectives of retirement. It is not only about budgeting but also about the goals that need to be achieved. Being specific is better while setting goals, for example - instead of mentioning travel, it is advisable to list out the places one wishes to travel to. It is alright to have a vague goal but start streamlining as you proceed towards retirement.

It is important to decide on the corpus required on retirement to support monthly expenses. Such an amount cannot be based on vague assumptions. Ideally one can consider current monthly expenses as on today excluding all EMI’s. Consider inflation on the monthly pension and one can arrive at the monthly pension that would be required at the time of retirement, however one should continuously visit and check whether such amount will be sufficient enough or whether it needs an upward revision

Another aspect that should be noted is the time span till retirement. If a 25 year old is planning for retirement, the amount to be saved each year is lower than if a 35 year old is saving for retirement.

Current Age

Retirement Age

Corpus Reqd. for Retirement

Investment Reqd. Monthly

25

55

       10,000,000

                   6,710

30

55

       10,000,000

                 33,333

35

55

       10,000,000

                 41,667


We have assumed 8% growth rate

Start tracking your income and expenses for a couple of months before retiring and then determine how much will be needed (i.e., budget) to support your lifestyle. Apart from keeping a check on income and expenses, it is very important to keep track of assets. Traditional assets such as land, additional house, etc. could prove a beneficial source of capital in later years. Apart from one’s own investments, there are a few other sources for retirement funding such as company pension policy, government pension schemes, reverse mortgage of house, etc.

Long term investments are the best option for individuals investing early in life, since one can benefit from the power of compounding. One should also make investments towards their retirement savings via the ECS route - making the whole process automatic, and ensuring that no surplus expenditure gets in the way of your retirement planning. It is advisable for you to choose higher returns yielding investments. Higher the rate on return sooner the one's financial goal will be reached. For example if an individual invests Rs.10,000 each year at 10% then the individual has to save for 22 years 5 months to have Rs. 1 Cr, however if the same individual invests Rs. 10,000 each year at 15% then the individual has to save for only 17 years and 6 months to have the same Rs. 1 Cr.

Debts are another area which needs to be focused on. If one has high levels of debt, one will be unable to service this post retirement. Ideally, you should look at repaying all the outstanding loans as soon as possible to ensure that you are not hit with interest payments after retirement.

Sometimes it may require to change or diversify the investment portfolio accordingly to manage the risk and return. For example: A portfolio of equities could be rearranged to a portfolio of fixed income, to bring in security during retirement phase.

There are a few areas which have to be kept in mind while planning for retirement such as medical expenses, medical emergencies, big ticket purchases, and unexpected expenses. Senior citizens are more likely to require medical care, and as a consequence the medical expenses for many retired people is very high.

Summary:
•    The earlier you start to save, the earlier you can retire
•    Equities are the best option initially, and gradually shift this allocation to debt as one ages
•    Make a budget and stick to it
•    Take into account the lifestyle you want at retirement when planning the retirement corpus

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