Retirement Planning: The Ultimate Guide for 2024
What are your plans for retirement?
Do you need the longest vacation? Or just sit at home watching some old retro movies? You may also have a plan to start your business.
Whatever your plans may be, you need to start working for retirement as soon as you start earning. But, when you start earning in your early days, that’s when you just enjoy your time in your leisure and retirement is just farthest from your mind. But, when the actual retirement time arrives, you realize it’s too late to start your planning. Suddenly you also realise that you are not getting your regular monthly payments means you need to live your entire life only on the savings you accumulated over the past years. Scary! Right?
Do not worry! This article will help you to know why planning for your retirement is important for you and also a step-by-step guide for your retirement planning.
Why retirement planning is important?
We all have fantasized about our retirement days getting free from all the work responsibilities and living a luxurious and peaceful life. However, only a few of us will be able to achieve the ideal retirement life. Here are the top reasons why retirement planning should be on your priority list:
1. Rising Inflation:
We all know how inflation is continuously surging and this means you need
to pay higher amounts for everything in the future. If you cannot keep up with rising costs,
you may have to compromise on the quality of life. Having a solid retirement plan, one that
accounts for inflation, return on investment, and so on, will ensure you enjoy retirement to
2. Medical emergencies:
As time passes and your age increases, health issues become
unavoidable. Medical expenses are bound to deplete your savings and leave you financially
stranded after you recover. Even normal dental procedures have become so expensive. And
in situations like this, your retirement corpus must be large enough to cover your family’s
3. Financial independence:
For generations, older Indians have relied on their children to
support them in retirement. Young people are becoming more self-sufficient in recent years.
And to live the same life on your own terms and not be accountable to anyone, you need to
have a sizeable retirement corpus.
Step-by-Step Guide for Retirement Planning
Step 1: Choose your retirement age –
It is a personal choice for everyone to decide at what age they want to retire. The most common
answer is 60 years. However, it can be 55 or even 50 years, it’s up to you! Also, your retirement
age depends on your future goals and liabilities. While most people want to retire early, it comes
with its own set of difficulties. The sooner you decide to retire, the longer your post-retirement
life will be, so you need to save a bigger retirement corpus. It is also important to consider
factors such as age, medical condition, family history, and others when determining retirement
Step 2: Determine your Retirement corpus –
To calculate the corpus amount, you need to make some assumptions and estimates on various
variables. It is difficult to find the exact amount of the corpus you need. The variables
considered in such calculations are:
- Monthly expenses
- The expected rate of inflation
- life expectancy, etc.
It is best to calculate your ideal retirement corpus by taking your current monthly expenses and
extending them until retirement age while factoring in inflation.
Calculate the Real Rate of Return
Let’s assume the real rate of return on investment is 8 percent and inflation is 7 percent.
So, to calculate the real return, the formula is [(1+Return)/(1+inflation rate)]-1
[(1+8%)/(1+7%)]-1 = 0.93% (multiplied by 100, to get the number in percentage form)
Calculating Retirement Corpus
Assuming Mr X’s current age is 35 years and you want to retire at the age of 60. And your current yearly expenses are Rs. 9,00,000. Life expectancy is assumed 90 years.
Expenses at the time of retirement: Current expenses * (1+inflation rate)^n
Here, n means the number of years left for retirement. So, in this case (60-35)= 25 years 9,00,000*(1+7%)^25 =48,84,689
So, at the age of 60, your living expenses would be Rs. 48,84,689
Some expenses, such as medical expenses, travel, and house maintenance, may rise over time.
On the other hand, some expenses, such as housing loan repayment, child education expenses, income tax, and so on, tend to decrease.
Now, the final step is to calculate the retirement corpus.
For that, use Excel and calculate your corpus in the PV (Present Value) function.
Your retirement corpus that will be required will be Rs. 12,73,61,182.
So, if you do not have much time to calculate your corpus, you can also use retirement calculators available online on various websites.
Step 3: Start investing early –
People frequently ignore retirement planning thinking they have enough time to retire. But, in most cases, people get a shortfall of the amount in their actual retirement years and they face the worst nightmare. For that reason, it is highly recommended to start early investing and the main benefit is you’ll have a good time increasing your corpus.
If you are in your 20s, then it’s the best time to start investing for your retirement because you have a lot of time and not much financial stress.
And if you’re in your 30s and haven’t even begun your planning for retirement, it’s still not too late. You still have a lot of time to work, earn money, and save for your golden years.
Step 4: Set aside a fixed percentage of your income for retirement savings –
We always save for short-term goals and spend all our savings on fulfilling them. But for a safe future, you need to set aside some fixed percentage of your salary for retirement. It is also important not to spend any of the corpus (the main amount) before retirement.
Step 5: Asset Allocation –
It means you should invest in various asset classes like stocks, bonds, debt, gold, etc. while constructing your retirement portfolio. Each asset class has some unique characteristics and to take advantage of that, you need to maintain a balance between each of them. While investing, you should look for the years left for retirement and risk tolerance. For example, if you have a long time left for retirement, say 10-12 years, then you can invest in equities for capital appreciation. And if your retirement is almost near, it means your risk-taking ability will be reduced; hence you should sell off your equities and convert them into debt.
Step 6: Find out ways to cut out extra expenses –
Start saving now with the best stock broker in India, whether your retirement is years or months away. It will always improve your preparation. If you are unable to save enough for retirement, reduce your extra expenses such as restaurant meals, vacations, shopping, and so on. That doesn’t mean you have to put all of your extra money into retirement accounts — but there’s never a bad time to cut your expenses and save some of it. Make a list of all your expenses and look for different ways to cut them.
This will help you to save more and reach your targeted retirement corpus fast.
Step 7: Keep track of your plan and review it regularly –
You need to track and review your plan on a regular basis, at least once a year. This is an important step to make sure that everything is going according to the plan to meet your goals on time. Also, any changes in income, retirement age, expenses and so on must be factored into the retirement plan.
Important factors to keep in mind while your retirement planning
1. Pay off your debt:
This is the most important factor to consider when planning for retirement. Nobody wants to retire with unnecessary debts; everyone wants a peaceful life ahead of them. As a result, it is critical to plan for debt repayment before retirement. Pay off your high-interest-rate debts first to secure your retirement from liabilities.
2. Set automatic transfers:
To make a sufficient retirement corpus, you need to invest regularly. For that, you can set automatic bank transfers for investing. This will help you to avoid any delays or any missing monthly payments.
3. Get adequate health coverage: With age, you will have to spend more on health planning.
In order to reduce the expense of health care, it is essential to get good health coverage. The premiums for coverage will be lower if you purchase it now rather than later, and insurers will be less likely to reject you.
4. Do not overlook other goals:
Apart from retirement, there are other goals as well like a house purchase, children’s marriage, etc. You need to identify the other goals as well and start planning for them. Also, make a separate budget for it and start investing.
5. Divide your retirement funds between lump-sum and regular annuities:
You should ensure your retirement corpus is large enough to cover your regular monthly expenses, as
well as your emergency and social needs after you retire. Lump-sum flows and regular annuities are often combined in retirement plans. You should structure your annuities in such a way that they generate optimal returns.
Retirement planning is one of the most important aspects of your overall financial planning. As a result, it is critical to plan your retirement as early as possible considering the factors like inflation, medical conditions, etc. The above steps can help you arrive at your retirement corpus and plan your investments more effectively. Happy investing!