The Strategy for Successful Retirement Planning

How well are you prepared to live a comfortable life after retirement? With steady increase in life expectancy coupled with willingness of people to retire early, one may have 25 years of life post retirement. One must factor in that healthcare cost increases with rise in age and given the inflating healthcare cost, it would tend to consume a large share of expenses of the individual post-retirement. Therefore, it is critical that retirement planning is given some serious thought.

Now let’s understand what does retirement planning mean? It basically involves managing the finances post-retirement for one’s own self and one’s spouse. It is important that you ensure that you have financial independence in those old years of your life and are self-reliant when it comes to money matters.

The first question to address in this case is – when should you start planning for your retirement? Like all other investments, the earlier you start, the better it is for you. The later you start your planning, the more you will have to save on a monthly basis for meeting the same standard of living post retirement. The sooner you get started, the greater are the chances of reaching your retirement goals because compound interest can work its magic. Also, advice from a financial expert would help one do better retirement planning since it requires an understanding of various asset classes.

Let us understand the correct steps to ensure that one does prudent financial planning:

Start early to get the benefits of compounding

Einstein said, “Compound interest is the eighth wonder of the world. He, who understands it, earns it, he who doesn't, pays it.” In layman’s language – compound interest can turn a negligible small fund invested regularly into a massive fortune.

It is very important to start early. Investing Rs. 5000 a month at the age of 20, and earning compounding interest of 12 per cent, will give you a fortune of Rs 5.93 crore when you retire at 60. However, if you start doing the same thing at 30, the sum accumulated at the age of 60 would be just Rs 1.75 crore. Thus, if you start early, your money gets more time to grow.

To benefit from the magic of compounding, only two things are necessary apart from the invested sum. One is a long-term projection to give the money enough time to grow and second is patience, to be able to wait for it.

Use SIPs rather than lumpsum investing

?It is impossible for an average investor to make a one-time investment that would take care of his retirement. One must understand that retirement planning is not a one day exercise, but is to be done over a longer period in regular intervals.

For this, one must look at what is called a Systematic Investment Plan (SIP). An SIP entails investment of a small amount of money at regular intervals, say weekly, monthly or quarterly into an investment fund. This small investment made regularly gives attractive returns over a long-term horizon. This is because the tool of compounding works its magic on the investment.

The mechanism of an SIP works like this: A pre-decided amount is debited from the investor’s bank account and invested in an MF or stock/s, which is specified by the investor, on a pre-decided date. On the basis of the amount invested, a certain number of units/stocks are allocated to the investor according to the ongoing market rate for the day.

An SIP enables an investor to establish a substantial corpus over a period of time, and have enough money saved for the time of retirement. SIP-ing should be done in direct equities or mutual funds tilted towards equity. Also, one should step up their SIP amount as affordability and income increases.

Include equity in your portfolio mix

There are two main objectives while investing for retirement:

1)     Your investment should beat inflation by a certain margin so that you have more returns than the expenses that you have to bear ultimately.

2)     By the time of retirement, your corpus should be such that your daily expenses could be covered by a monthly amount withdrawn from the same.

This means that one requires the right portfolio mix to get the best results.

Studies have proven that equities are considered the most rewarding investment option, if held over a long duration. They yield far superior returns than any other investment. Historical data proves the same. The average annual return of the stock market over the period of last sixteen years (2001 till date), considering the Nifty50 index as the benchmark to compute the returns, has been around 15 per cent.

Moreover, equity investments offer 2 more benefits:

a)     One can make investment or exit from equities online or through just a phone call on any working day; thus equities offer ease of transaction since they are highly liquid.

b)     Shares can be stored in a dematerialized form, thus leading to a low cost of transaction and ease of storage.

The withdrawal of one’s retirement fund also has a tax implication. However, if your investments are in direct equity or tilted towards mutual funds with equity exposure, then it makes it a tax efficient strategy as one would not have to pay capital gains tax on redemption of investments held for more than a year.

Thus, equity investment, being adequately regulated, is relatively safe and rewarding compared to other form of investments, say real estate or gold.

At a young age, one should have a significantly high exposure to equities. Thereafter, with age, one can shift to more stable asset classes like debt funds, EPF, PPF. This strategy will ensure a growth oriented portfolio along with the comfort and certainty about the post retirement corpus.

Monitoring and rebalancing your portfolio

Once your regular investments start in an equity oriented portfolio mix, you must take out time for a periodic review (say quarterly) and rebalancing, if necessary. Retirement planning is a dynamic process and regularly reviewing this decision-making process will help you in making priority adjustments. This will bring your retirement goals and activities in line with your current life situation.

Set out a review calendar and devote time towards retirement planning as well as take expert advice. The review may give you insights on stepping up your investments or changing the portfolio mix or stock selection. It is advisable that instead of committing a fixed amount towards the investment periodically, one should a allocate a certain percentage of income towards retirement planning, which on compounding over a period will be sufficient enough to cover all the expenses after retirement.

Focus on healthcare

The major concern for an individual post retirement is that of their health. It is, therefore, quite important to build a retirement corpus incorporating medical expenses when one is young and healthy. As a thumb rule, around 20% of the expenses should be allocated to healthcare, post retirement.

One should enroll for an adequately all-inclusive health insurance product. It should have adequate coverage of all medical ailments. Also, one should buy a health insurance policy early as it not only reduces the burden of premium paid but it also covers you against treatments that require one to serve several waiting periods. With an early cover, one can earn loyalty bonus as most health insurance policies offer a loyalty bonus if the customer continues with the same policy year on year.

Focus on withdrawals with SWPs

When one approaches retirement, one should ascertain the regular cash flows required monthly, quarterly or annually. The Systematic Withdrawal Plan (SWP) comes handy to meet this need. The SWP is a facility that allows an investor to withdraw money from an existing investment at predetermined intervals. It is the reverse of an SIP i.e. the investor regularly withdraws a fixed amount of money from a lump sum already invested in a fund. The investor directs the AMC to redeem a designated sum of money and/or units at pre-determined regular intervals and credit the sum to his/ her bank account.

The amount to be withdrawn and the frequency are decided by the investor as per his/her requirements. The fund’s value and number of units will reduce with each withdrawal. This process will continue till the complete investment is redeemed.

Summarizing the above, it is necessary to start early when planning for your retirement. It is important to plan for healthcare expenses also along with one’s other daily expenses in the future. Small sums of money invested at regular intervals enable one to utilize the power of compounding, if invested for a longer tenure. Moreover, small sums of money withdrawn at regular intervals too enable one to properly manage their retirement corpus. Due to the benefits offered by equities, one should try and ensure that their portfolio is tilted towards equity stocks or mutual funds. This will ensure a high return which beats inflation. Also, one must monitor their portfolio continuously and manage it from time to time.