Retirement Planning: An Important Life Goal

Sourabh Mahajan
Founder, True Wealth

Retirement planning is a crucial financial goal often overlooked by many. As per a survey conducted by PGIM MF in 2020, 51 per cent Indians don’t have any form of retirement planning in place. Up to 48 per cent are not even aware how much corpus they need for retirement. Further, according to a study by HSBC in 2018, seven out of 10 Indians expect their children to support them in their retirement while only three out of 10 current retirees actually receive such financial support. In earlier times, people staying in a joint family would seldom worry about their retirement and would depend on their family to take care of them in old age. However, now with urbanisation and in the era of nuclear families, gone are those days.

In fact, in today’s world while you can easily avail loans for life goals such as child education, housing, etc., there is no one out there willing to fund your retirement. Therefore, among all the long-term financial goals, retirement planning is the single most important goal that you must keep focused on and the earlier you start the better the outcome will be. This is because retirement planning is a multistep process and evolves over time. However, there is no one size fits all when it comes to retirement planning. A young adult in his early twenties will have more compounding years and can invest more into equity while a parent of two children in his mid-forties will have to take a more balanced approach.

As for someone approaching retirement in the next five years, he or she would have to opt for a relatively conservative approach. Some of the key steps in retirement planning are as follows:

1: Understand Your Time Horizon : Time horizon is the difference between your current age and expected retirement age. The longer the time available, the better it is since Financial Planning you get more years to save and compound your investments. At the same time, this will provide flexibility to invest in riskier asset classes like equities. With improved medical facilities, an average individual’s life span is increasing. Hence, your longevity also needs to be considered when planning for retirement so that you do not end up outliving your savings. Ideally, an individual needs to plan for a lifespan of 85 years i.e. 25 years of retirement period in case you are retiring at 60.

2: Determine Retirement Period Expenses : By the time you retire, the assumption is that you will be free from housing loan, kids’ education, etc. But post retirement, your medical expenses will go up. Retirees also sometimes spend their first few years on travel or other bucket list goals. So, all these expenses need to be accounted for while drawing up a retirement plan.

3: Follow Proper Asset Allocation : Based on your investment goal and risk tolerance, we can arrive at a proper portfolio asset allocation, one which takes into consideration your risk profile and aids in generating better risk-adjusted returns. As the investor goes through various life stages, the allocation proportion is likely to change. For example, a portfolio will be heavier on equity in the initial years and when closer to retirement and even post retirement, the portfolio will be conservative in nature.

4: Account for Inflation and Taxes : Many people make the mistake of ignoring anti-compounders like inflation and taxation while investing. While planning for retirement, it is very important to invest in securities with higher after-tax real return. For example, let us consider a 5.5 % FD for a 30 % tax slab individual with inflation @ 4%. The after-tax real return for this investment is -0.15%.

5.5 % (FD) - 1.65 % (Tax) - 4% (Inflation) = -0.15%.

Some of the other key things to ensure before retirement are getting adequate life and health insurance cover, creating an emergency fund, ensuring zero or minimum debt, cutting down on unnecessary spending and estate planning. So it makes more sense to invest in products which have the possibility of giving you a higher after tax real returns for eg Mutual funds

Key Takeaways
Retirement planning is not a very difficult process, yet it is elusive to many given the general lack of understanding about its importance. The focus needs to be on starting early and saving regularly based on a comprehensive retirement plan crafted by a financial advisor. The main part here is the need to have a plan that strikes a balance between realistic return expectations and your desired standard of living such that you do not have to depend on anyone in your golden years.

The writer is Founder, True Wealth
 Email: mytruewealthsolutions@gmail.com