Retirement is a significant transition in life, giving up regular work and income because of age or earlier due to other compulsions or aspirations. While it could be a time to enjoy the freedom and pursue hobbies for some, retirement, unless planned well, can significantly impact emotional well-being due to financial concerns or health uncertainty.
Retirement planning is not just about accumulating corpus. It is multidimensional and better to think of holistically early in life—owning a residence, sufficient medical insurance, estate planning and WILL, and other financial assets.
With a thoughtful approach, one can live a life to pursue hobbies with personal growth and begin a new chapter of meaningful life with dear ones.
World Financial Planning Day – the importance of financial planning
Let us begin the retirement financial planning process by considering some retirement goals. Make goals as early in life as possible. While some are wise and lucky enough to decide on a place for retirement, most people are not sure. The decision should revolve around lifestyle choices to maintain a sense of purpose in living and get a sense of identity through social connections. Other life goals, hobbies, travel, health and insurance, assets for heirs, and their financial implications set the stage for retirement planning.
What is the corpus required to achieve retirement goals?
With increasing life expectancy, retired life spans for 30 years, and working life is reducing from what used to be 30 years. Retirement planning must factor in this. Estimating expenses involves creating the current budget and projecting it for retirement, including food, clothing, and housing, depending on the place of living, insurance, and other social needs. Consider inflation over the years of projection. You may want to add additional corpus for travel, hobbies, entertainment, or any community donations.
How do you implement a savings program?
Attitudes and actions toward retirement planning change over the different stages of life. It might seem abstract to consider retirement planning during the early years of earning, but modest early savings can work wonders by compounding for the next thirty-plus years.
During midlife, income rises, bringing in more aspirations, mortgages, and loans. It is also critical to put aside money for retirement planning. It is best to leave the retirement kitty untouched. Taking out sufficient medical insurance is also of the utmost importance. A decade before retirement, it is best to streamline investments to provide regular income once income from the primary source stops. During retirement, all the savings over the years will help live a healthy and peaceful life.
Where should you invest?
Where should you invest? Should you invest in bank fixed deposits to preserve the corpus or invest in equity-linked products to provide for growth over the years? A retirement corpus needs a long-term strategy of growth to sustain its life span and regularity in the short term. A general myth prevails that retirement corpus should not be exposed to market risk. A diversified portfolio of index stocks, index mutual funds, or diversified mutual funds would be a simple strategy. As the stock markets grow, the corpus also grows. Stay invested through the market cycles to tide over the market risk. Most people want to be conservative by investing only in fixed-income securities like bank fixed deposits (FD), senior citizen saving schemes, etc.
A bank fixed deposit can be operated by any family member with minimum knowledge of finances and is a must for emergency funds. Structure fixed deposits to provide regular income in the short term, allowing equity markets to work for you in the long term. Provident funds are a good option for growing the retirement kitty right from the first salary as they offer EEE benefits. After retirement, a portion of it could be allocated to senior citizen saving schemes offered by the Government.
Many individuals opt for rental income as a source of retirement income, but it comes with its own challenges, including property maintenance and the difficulty of securing quality tenants. These challenges ultimately lead to low property yields. It is better to avoid additional property, which only adds to more work.
Managing assets and risk: Keeping fewer investments is of utmost importance. Maintaining just 2-3 bank accounts and a few folios and stocks brings efficiency and ease of managing assets. Fewer investments help with paperwork, managing volatility, and timely payment of taxes. Simplicity helps.
Ultimately, you must have an estate plan to support dependents and family. Whether to give assets away as gifts while still alive or as an inheritance after death. A will is a simple legal document determining what will happen to your assets after death.
(Author is Prof Kalpakam Gopalakrishnan, Associate Professor – Finance & Law, K J Somaiya Institute of Management. Views expressed here are personal.)
